U.S. Markets Construction Overview - FMI

Knowledge • Expertise • Relationships
U.S. Markets Construction Overview
2012

FMI Contributing Authors:
Mike Clancy Senior Consultant
Randy Giggard
Kevin Haynes
John Hughes
Steven Isaacs
Scott Kimpland
Lou Marines
Managing Director
Senior Consultant
Vice President
Division Manager
Director
Consultant
Wallace Marshall Consultant
Brian Moore
Principal
Brian Strawberry Research Consultant
Grant Thayer
Rick Tison
Phil Warner
Consultant
Research Consultant
Research Consultant
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FMI Corporation
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FMI Capital Advisors, Inc. Contributing Authors:
Hunt Davis Vice President
Michael Landry
George Reddin
Tim Sznewajs
Randy Stutzman
Robert Womble
Curt Young
Managing Director
Managing Director
Managing Director
Managing Director
Analyst
Vice President
Departmental Editors:
Hank Harris President and CEO
Lee Smither Managing Director
Proofreaders:
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Mary Bjelica
Elaine Bowen
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Ann Hughes
Pam Nettles
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Introduction
FMI, the nation’s leader in consulting and investment banking services
for the engineering and construction industry, is pleased to present the
2012 U.S. Markets Construction Overview. This publication offers
insights into some of the construction industry’s most complex business
challenges.
FMI publishes the U.S. Markets Construction Overview annually. The
Overview includes a comprehensive report on current and emerging
construction trends and forecasts the growth or decline in each market
segment, noting both short-term and long-term considerations.
We hope this document will provide you with a thorough understanding
of the economic and other major issues affecting the industry and
serve as a starting point for your company’s strategic planning efforts.
However, we must caution that major decisions should not be made
without additional investigation and research of your own specific
geographic and construction market segments.
We welcome your comments and questions. Your feedback is important
to us and helps us to improve our service to you. Please complete the
form at the back of this publication to give us your input about the
Overview and to reserve a copy of next year’s issue.

Table of Contents
Executive Summary .......................................................................................................................................................... 2
Section 1: State of the Economy ............................................................................................................................... 6
What’s Really Ahead?
A Provocative Look at What the Next Five Years Could Hold for the U.S. Construction Industry ............................................. 6
Government Construction Facing a Downturn ................................................................................................................................ 14
A Recovery Without Housing? ......................................................................................................................................................... 19
Section 2: Stakeholder Trends ................................................................................................................................... 27
Architects/Engineers/Contractors ..................................................................................................................................................... 27
General Contractors ........................................................................................................................................................................ 31
Heavy Civil Contractors .................................................................................................................................................................. 33
Trade Contractors ............................................................................................................................................................................ 34
Publicly Owned Contractors ........................................................................................................................................................... 38
Building Product Manufacturers ...................................................................................................................................................... 47
Owners ........................................................................................................................................................................................... 50
Private Equity .................................................................................................................................................................................. 53
Surety .............................................................................................................................................................................................. 54
Construction Materials .................................................................................................................................................................... 56
Section 3: Construction Outlook .............................................................................................................................. 61
Construction Forecast ..................................................................................................................................................................... 61
Residential Construction ................................................................................................................................................................. 65
Nonresidential Buildings ................................................................................................................................................................. 66
Non-building Structures .................................................................................................................................................................. 76
Construction Put in Place ................................................................................................................................................................ 81
Regional Summaries ........................................................................................................................................................................ 83

2
The 2012 U.S. Markets Construction Overview
Executive Summary
As we publish this 2012 edition of FMI’s U.S. Construction Market Overview, the global and U.S. national
economies continue to struggle. This publication focuses primarily on the U.S. domestic construction
market, which is also a lagging reflection of the country’s economic health. The broad picture is not
dramatically different from last year. We remain in difficult times. Notwithstanding, FMI’s core purpose
as an organization is to have a positive impact on the construction industry and its leading organizations.
We can only accomplish that through collaboration with the many leading thinkers and successful organizations
that populate the built environment. Our goal is that this publication provides a basis for further
collaboration, investigation and planning by and with the industry’s best and brightest executives.
In that spirit, we offer a synopsis of current and emerging trends affecting the industry. These are useful
in reflecting on implications for given markets and organizations. Our forecast for major construction
markets through 2015 and a look at the drivers behind those markets are included.
Regular readers might observe that this year’s forecast has not changed dramatically from last year, but
total put in place construction volume is pushed out to 2015 before it matches the prior peak of 2007.
This is consistent with our general view of a long and slow recovery of the construction markets.
Housing has been, and continues to be, a cloud hanging over U.S. economic recovery. “The Wall Street
Journal” recently observed that new starts are only about .03% of GDP, although historically they have
risen to .5% in the two years following recessions. However, housing has an enormous ripple effect in
the overall economy, and it is hard to overstate the emotional ties of home ownership to the American
psyche. The question of an economic recovery in the U.S. not led by housing is an interesting one. It is
unprecedented, but we believe possible, and we explore that issue in some depth this year.
Another issue examined this year is the expected decline in public spending. Government construction
has been rather a safe harbor for some firms the past few years, but budget constraints are expected to
cause serious problems here. We take an in-depth look at what is expected and some of the issues surrounding
the tension between demand and capital availability.
Since we published the last annual version of this report, many of the trends affecting the industry remain
in play. Consolidation, especially at the large end of the market, continues to occur. Globalization
influences the domestic market via further penetration of international firms and a growing number of
U.S. E&C firms pursuing international markets. Technology advancements aid these expansion strategies.
Technology also continues to affect numerous implementation strategies and different project
delivery systems. However, the ease with which technology advancements are replicated makes the
achievement of competitive advantage through their application an elusive proposition.
Numerous players continue to converge at the front end of the construction value chain. Program managers,
owners’ representatives, agency construction managers, general contractors, design firms and
numerous consultants all are vying for the primary relationship with the client. The perception is that
paying for value only occurs at the top of the food chain, and commodity purchasing prevails from there.

Executive Summary
3
As this battle continues, we see significant entry of engineering firms into the construction business
and vice versa. As the “theory” of design and construction convergence has become a market reality, it
is clear that engineering has led as the design discipline to make it happen. By contrast, architecturally
dominated firms remain relatively small, fragmented and independent from construction. The number
of real design-build firms that feature architects integrated with constructors is small. By contrast, the
number of E&C firms in the U.S. is significant, growing and composed of firms with critical mass and
financial strength.
We also look at other major participants in the creation of America’s built environment. Since the flow
of project capital always starts with owners, we observe how they are responding to the down economy.
Unfortunately, a large amount of this is a predictable return to a “price only” procurement mind-set.
With this added to the pressures resulting from the residential downturn, companies in the materials
business are feeling a huge strain. We review the status of business for building product manufacturers as
well as construction material providers. These include companies whose primary business is the provision
of aggregates, asphalt, concrete and related materials to the industry.
From a construction standpoint, this Great Recession and its aftermath are more about the flow of
capital than supply/demand imbalance. While select markets are overbuilt, most are not. In many markets,
quite the opposite is true and there is significant pent-up demand. We examine project funding
challenges and related impact of the down market on private equity investors. We also cover the public
company perspective, although it is a small portion of the overall industry.
Our markets and industry remain challenged at present. While we believe recovery will be slow, we will
recover. It is difficult to get past the 24-hour drumbeat of bad news in our modern world, but long-term
opportunities will be abundant. Americans generally view the 1950s as a period of great prosperity.
One of my colleagues recently made an interesting observation – who in 1936 could have predicted the
1950s? We believe that the U.S. will recover and so will the construction industry. Now is a good time
to be planning for what your firm will look like when this cycle finally passes.
As a senior leader in this industry, undoubtedly you are charged with seeing beyond the current malaise.
We hope our efforts here assist you in that process and invite you to contact us if we can help further.
Thank you for reading and reflecting with us.
Sincerely,
Hank M. Harris Jr., cmc
President and Chief Executive Officer

State of the Economy SECTION 1

Section 1: State of the Economy
5
With the publication of each year’s U.S. Markets Construction Overview,
we at FMI scratch our collective heads to determine which key
drivers are causing certain markets to perform differently than others
and why. Looking back on 2011, there were opportunities for
some and disappointments for many. Several outstanding problems
still must be addressed in order for any real recovery to take hold. We
have always known that our industry’s economic success is linked indirectly
to variables outside of our control. Today, those factors seem
to be so extreme in their volatility, which makes it all the more difficult
for many to anticipate the future. In this section, we examine
four potential scenarios of the future, the impact of government on
the industry, and the residential market. We also contemplate the effect
of our political climate, constricted capital markets, EU’s financial
situation and state of the housing industry. Our intent is that these
analyses and compilations stimulate, provoke and cause you to think
more about tomorrow and how best to prepare your company. For
example:
• What does this mean in terms of our future markets?
• Are our core strategies affected?
• Will our skill set still be relevant in the future?
Regardless of the conclusions you draw, give serious thought to these
questions and, most importantly, to the implications and actions required.
What Is Really Ahead?
A Provocative Look at What the Next Five
Years Could Hold for the U.S. Construction
Industry
By Wallace Marshall, Randy Giggard and Lee Smither
If there is one thing almost everyone can agree on as we approach
the end of 2011, it is that the near-term future of America’s economy,
political structure and, consequently, the construction industry appears
more uncertain than at any time in recent memory. The uncertainty
is altering the way many contractors plan for the future.
Traditionally, strategic planning with our clients involved three basic
steps: (1) thorough research and analysis of our clients’ markets; (2)
an in-depth evaluation of our clients’ organization, and (3) crafting a
compelling vision and detailed strategic plan to maximize our clients’
success for the foreseeable future.
That is still the right model for some companies. However, the radical
uncertainty of today’s marketplace has increasingly led us to advocate
“multiple-scenario” strategic planning as a better model for many
of the contractors we work with. The general structure of the three
steps outlined above remains the same. But instead of determining
what the future will look like and then building a single strategic plan
based on that, the new model incorporates three to four different scenarios
and outlines a different strategic direction for each situation.
Of course, it is not possible to pursue multiple strategic plans at
the same time. A company still has to choose a most likely scenario
around which to build a detailed strategic plan. The resulting plan
has a much more provisional nature and is revisited with greater frequency
than was the case under the traditional model; and our client
is prepared to move quickly and decisively if an alternative scenario
begins to materialize. In today’s highly uncertain market, the six to 18
months saved on the multiple-scenario model can be the difference
between moving to the head of the pack or being left behind between
selling your company at a solid multiple or exiting the business with
little in hand.
In this article, FMI outlines four potential scenarios for the direction
the U.S. construction industry could head over the next five years.
Although researched-based and a product of bringing our leading
consultants together to assess, analyze and debate, it is important
to recognize that these scenarios are just that … they are scenarios,
not forecasts. We provide them as a basis for stimulating creative
thought, not as a prescription for the future.
Scenario # 1:
Rapid Escalation of the Global Financial
Crisis
Let’s take the worst-case scenario first. In April 2011, the nation’s
second-largest university endowment, the University of Texas at
Austin, doubled its gold holdings from $500 million it acquired in
2009 to $1 billion. The trustees also opted to take physical delivery
of the gold: 6,643 bars were transported to a J.P. Morgan vault in New
York City. The Longhorns now own as much gold as the country of
Brazil. Asked to explain the university’s rationale for the investment,
one of the endowment’s board members responded, “Central banks
are printing more money than they ever have, so what’s the value of
money in terms of purchases of goods and services? I look at gold as
just another currency that they can’t print any more of.” [1]
The decision by the University of Texas endowment highlights the
insecurities of today’s financial markets. Many investors have shifted
from looking for a solid return on their investment to merely seeking
a safe haven where their wealth will not be in danger of evaporating.
1. David Mildenberg and Pham-Duy Nguyen, “Texas University Endowment Storing About
$1 Billion in Gold Bars.” Bloomberg Businessweek, 16 April 2011. http://www.businessweek.
com/news/2011-04-16/texas-university-endowment-storing-about-1-billion-in-gold-bars.html.

6
The 2012 U.S. Markets Construction Overview
Who can blame them? No one who takes a serious look at the global
financial and currency markets can go away without a feeling of uneasiness.
Consider some of the numbers. America’s national debt has skyrocketed
to $14.6 trillion over the last four years, a 62% increase from the $9.0
trillion it owed at the end of 2007. With an additional $1.2 trillion of
debt at the state level and an estimated $1.8 trillion at the local municipality
level, our total government debt is fast approaching $18 trillion.
That works out to roughly $176,000 per citizen, $667,000 per family.
course of the West is utterly unsustainable. China knows this all too
well. The declining value of the dollar and the instability of the euro
mean that it is sitting on a proverbial volcano with its $3.2 trillion in
foreign exchange reserves (30% of the world’s total). It comes as no surprise
that in order to hedge its exposure, China is quietly accumulating
as much gold as it can, having now surpassed South Africa to become
the world’s leading producer, and is directing its sovereign wealth funds
to shift their focus to hard assets, natural resources and industrial commodities.
It is also aiming to make the yuan fully convertible as a traded
currency by 2015.
As if that was not enough, the U.S. government’s unfunded liabilities for
Social Security and Medicare stand at a staggering $45 trillion. That is
the most benign estimate. The true figure is undoubtedly much greater,
possibly as high as $95 trillion. And that does not count unfunded liabilities
for military retirement and disability benefits ($3.6 trillion)
and federal employee retirement benefits ($2.0 trillion). [2] Nor does
it include trillions more in unfunded liabilities by states and local municipalities.
To put this in perspective, the total debt and unfunded liability of the
United States government is at least equal to, if not twice, the GDP of
the entire world at its 2008 peak of $61.4 trillion. In December 2010,
President Obama’s bipartisan National Commission on Fiscal Responsibility
and Reform warned Congress that by the year 2025 – just 13 years
from now – federal tax revenue “will be able to finance only interest
payments, Medicare, Medicaid and Social Security. Every other federal
government activity … will have to be paid with borrowed money.” [3]
The view across the Atlantic adds little cheer to this picture. According
to the latest figures released by Eurostat, the statistical office of the European
Union, at the end of 2010, 14 of the EU’s 27 member countries
had debt exceeding 60% of their GDP, the maximum limit agreed to by
members when the EU was established in 1999. The ratio of government
debt to GDP across all 27 member nations increased from 74% in
2009 to 80% in 2010. There is a serious risk of sovereign defaults and
accompanying currency devaluations, and it is no longer clear whether
the EU will survive, at least in anything resembling its current structure.
Germany for one, with its revived manufacturing sector, increasingly
views its recovered economic fortunes as roped to a leaky, if not sinking,
ship.
The U.S. Treasury is aware of the danger posed by waning global confidence
in the U.S. dollar. In August 2011, the Treasury Borrowing Advisory
Committee warned, “The idea of a reserve currency is that it is
built on strength, not typically that it is ‘best among poor choices.’ The
fact that there are not currently viable alternatives to the U.S. dollar is a
hollow victory and perhaps portends a deteriorating fate.” [4]
The fluctuations and jitters of the financial markets thus have their basis
in something far deeper than a predominantly psychological “crisis of
confidence.” There is a crisis of confidence, to be sure. But it is rooted
in alarming economic realities. That is why addressing the problem
through an artificially induced stimulation of consumer spending and
capital investment cannot work. It is treating the symptom rather than
the disease.
In fact, in this case it makes the disease worse, both at home and
abroad. Every round of quantitative easing (a euphemism for printing
money) increases talk of a global currency war. A column in the “Financial
Times” a little more than a year ago summed up the situation as
follows: “To put it crudely, the U.S. wants to inflate the rest of the world,
while the latter is trying to deflate the U.S. The U.S. must win since it
has infinite ammunition: There is no limit to the dollars the Federal Reserve
can create. What needs to be discussed is the terms of the world’s
surrender: the needed changes in nominal exchange rates and domestic
policies around the world.” [5]
This is exactly what former Federal Reserve Chairman Alan Greenspan
told CNBC’s “Meet the Press” after Standard & Poor’s downgraded the
U.S. credit rating in August: “The United States can pay any debt it
has because we can always print money to do that. So there is zero
It would not be difficult to heap on additional melancholy data. But you
get the picture. Nothing could be clearer than that the current financial
2. Dennis Cauchon, “The Government’s Mountain of Debt.” USA Today, 7 June 2011. http://www.
usatoday.com/news/washington/2011-06-06-us-debt-chart-medicare-social-security_n.htm.
3. “The Moment of Truth: Report of the National Commission on Fiscal Responsibility and
Reform” (Washington, D.C.: The White House, December 2010), p. 11.
4. “70% of U.S. bonds mature in five years.” Reuters, 1 September 2011. http://business.
financialpost.com/2011/09/01/70-of-u-s-bonds-matures-in-five-years/.
5. Martin Wolf, “Why America is going to win the global currency battle.” Financial Times,
12 October 2010. http://www.ft.com/intl/cms/s/0/fe45eeb2-d644-11df-81f0-00144feabdc0.
html#axzz1XOXTcah0.

Section 1: State of the Economy
7
probability of default.” [6] This fairy tale of a magic money tree in the
Fed’s backyard may sound reassuring to the average American, which
is undoubtedly what Greenspan intended. But in the terminology of
the global currency war, Greenspan is saying precisely the opposite to
international creditors – that the U.S. can default simply by paying its
debts in devalued dollars. Greenspan is bluffing, of course. The U.S.
does not have “infinite ammunition” because it cannot print away its
debt without catastrophic consequences.
There is reason to hope that Congress, prodded by an electorate that is
increasingly aware of the suicidal course we are presently on, will, at the
ninth hour, finally get its fiscal house in order, massively reduce the cost
of government and enact sweeping changes to reduce the regulatory
burdens on U.S. multinational corporations, thus encouraging them to
invest their accumulated cash in their home country.
However, in the scenario we are considering here, that will not happen.
Nor will the EU be able to get its fiscal house in order. Instead,
the indebtedness of western nations will continue to escalate, followed
by massive defaults on national debts, rapid devaluation of currencies,
inflation, hyper-inflation in some countries and – if recent events in
England and Greece serve as any indication – waves of crime, rioting
and even outright revolution in some places. In short, it would be economic
and social chaos.
This is truly a worst-case scenario, and it gives us no pleasure to put it
forward. However, in view of the numbers, it is a scenario that has to
be taken into consideration within a multiple-scenario planning model.
What are the characteristics of contractors most likely to survive such
a development?
• Strong balance sheets with a large percentage of cash, perhaps converted
into precious metals or essential resources.
• Diversified presence in foreign markets.
• Low fixed costs on the mainland, because construction in the U.S.
would come to a virtual halt for six to 12 months.
• Focus on the health care, technology, energy or industrial sectors,
because these would be the only sectors doing any building for a
long time to come.
How soon the worst-case scenario might unfold would depend on a
myriad of factors, such as the short-term effects of whatever kick-the-candown-the-road
measures American and European politicians are able to
concoct. A five- or even three-year timetable is not inconceivable.
6. Patrick Allen, “No Chance of Default, US Can Print Money: Greenspan.” CNBC.com, 7
August 2011. http://www.cnbc.com/id/44051683/No_Chance_of_Default_US_Can_Print_
Money_Greenspan.
Scenario # 2:
The Lost Decade
As the U.S. recession marked the passage of its third year in 2011, economists
began to voice concerns that we might be in for a “lost decade”
similar to that experienced by Japan during the 1990s. In this scenario,
the U.S. and most European governments will attain enough fiscal discipline
to avert a financial collapse, but their economies will languish
through a period of anemic growth for another six to seven years.
Should this be the case, the U.S. housing market would not recover
for at least five years. According to the latest estimates, 11.8 million to
13.8 million new households will form between now and the end of the
decade, depending on the pace of immigration and other factors. [7] The
number of homes vacant year-round has risen to 14.3 million, which is
11% of the total inventory of 131 million. [8] It is important to understand
that not all, or even most, of those homes have to be absorbed
before new construction can begin, since the percentage of homes vacant
year-round has averaged around 8% over the last three decades. [9]
That means that the current level of excess inventory stands at roughly
four million homes.
That figure, however, is sure to rise due to the high level of “shadow
inventory” currently in the pipeline. Shadow inventory is a term the real
estate industry uses for homes that are either currently in foreclosure,
have mortgages in default but have not yet been foreclosed upon, or
have been foreclosed by banks but not yet put on the market. No one
7. George S. Masnic, Daniel McCue, and Eric S. Belsky, “Updated 2010-2020 Household
and New Home Demand Projections.” Joint Center for Housing Studies, Harvard University,
September 2010.
8. Mark Whitehouse, “Number of the Week: Glut of Vacant Homes Complicates Recovery.”
Wall Street Journal Blogs, 28 May 2011. http://blogs.wsj.com/economics/2011/05/28/number-of-the-week-glut-of-vacant-homes-complicates-recovery/.
9. Frederick J. Eggers and Alexander Thackeray, “32 Years of Housing Data.” Prepared for
the U.S. Department of Housing and Urban Development, Office of Policy Development and
Research, by Econometrica, Inc. (Bethesda, Md.: October 2007), p. 5.

8
The 2012 U.S. Markets Construction Overview
knows just how many homes are in this shadow inventory, but it is
significant. An August 2011 report by Lender Processing Services,
which was based on a huge sample of 40 million U.S. mortgages,
puts the number of delinquent home loans as of July 2011 at 6.5
million, only 2.2 million of which have so far entered the foreclosure
process. [10] That does not include homes that have foreclosed but are
not yet on the market.
The upshot is that the true level of excess inventory in the residential
market (over and above the historical 8% of year-round vacant
homes) exceeds 10 million homes. Without an economic rebound,
it will be a long time before that is absorbed. The reported decline
in foreclosures in 2011 was not the result of a stabilizing residential
market, but was rather due to procedural holdups such as the socalled
“robo-signer” scandal. In the current scenario, moreover, high
unemployment will continue, resulting in further foreclosures and
a “doubling up” of households, adding still more inventory to the
pipeline.
The commercial and retail markets will not recover until after housing
does and in the interim will be plagued with high vacancy rates
resulting from rising unemployment as well as downsizing and failed
businesses. So where would that leave the U.S. construction industry?
Part of the answer depends on the political course the country
follows on this scenario. With current economic woes persisting into
the next election, this becomes a difficult call. Depressed economic
conditions might make a regime change seem likely in both the presidency
and the Congress, but it could easily go the other way if distressed
voters see further government intervention as their best hope
of salvation.
If a stronger, more broadly defined federal government is the model
for the future, it is entirely conceivable that we could move into an
era of big, European-style government. Heightened environmental
regulation, while discouraging overall capital investment in the U.S.,
could significantly increase the number of industrial retrofit projects,
in the near term. Additionally, the implementation of a national
health care program could result in a short-term spike in health care
construction as projects that have been on hold due to political uncertainty
become free to proceed. In the long term, however, a government
takeover of health care could also result in “utilitarianism” in
the industry, and the emphasis among facility owners would shift to
austerity and functionality, thus discouraging new construction and
renovation.
On the other hand, a loosening of environmental regulations and the
10. “LPS ‘First Look’ Mortgage Report: July Month-End Data Shows an Increase in the
Delinquency Rate and Decline in Foreclosure Inventories.” 16 August 2011. http://www.
lpsvcs.com/LPSCorporateInformation/NewsRoom/Pages/20110816.aspx.
creation of a national energy policy could lead to a renewed focus
on increasing domestic energy production similar to what has taken
place in Canada over the last two years. Health care construction
would continue its relatively strong pace as owners compete to serve
an aging population.
Regardless of what happens in November of 2012, a recovering
economy requires ample energy, at preferably lower prices. Power
generation, be it gas, coal, nuclear, wind or solar, will continue to
be a relatively strong sector in the years to come. Technology-driven
projects, such as data centers and communications (both wired and
wireless), will also experience continued growth. As people require
wireless devices to provide more information at faster speeds, communications
infrastructure investment will continue at an increased
rate. Health care construction has demographics in its favor and will
provide opportunities for companies that are equipped to play in that
arena.
In general, the outlook for infrastructure construction looks relatively
positive in this scenario, no matter which way the political winds
blow. The pent-up demand for infrastructure projects will have to
find an outlet. Fiscal austerity notwithstanding, we believe that once
the dust settles, funding of infrastructure will be seen as a worthy
investment.
Public-private partnerships (P3s) will become more prevalent as municipal
and state agencies become more familiar with this funding
mechanism. P3s will not be a panacea for America’s aging infrastructure,
however. Voters have been reticent to hand over ownership of
roads and bridges to private, and especially foreign, entities. Even
if they become more open to this idea, most concessionaires are no
longer willing to assume traffic-volume risk, especially in the wake of
failures like San Diego’s South Bay Expressway, which declared bankruptcy
in 2010 after three years of unexpectedly low toll revenues.
That leaves availability payments as the primary financing vehicle,
which means that the state or municipality still has to come up with
the money to pay for the project. It just has a little bit longer to do it.
What about the supply side of the industry, though? On the lostdecade
scenario, it is inevitable that we will see a larger number of
contractor failures over the next several years. There is simply no way
the current market structure can sustain another 15% drop in construction,
and that is what we will see if the U.S. enters a prolonged
period of economic malaise, the aforementioned bright spots notwithstanding.
Besides, those bright spots will not follow immediately
in the wake of the November 2012 election, and some industrial and
civil contractors will not be able to ride out the wait. The industry
will be forced to consolidate.

Section 1: State of the Economy
9
Will the midsized contractors get squeezed out as the big get bigger?
To date, this long-discussed trend has not really materialized in the
U.S., as shown in a recent “FMI Quarterly” study. [11] Over the last
four decades, the largest contractors (ENR Top 400) do gain a greater
share of the entire construction market going into each recession, but
coming out of the recession their market share returns to its standard
historical level of 25% to 30%. This indicates that the change in market
share is probably a function of the sharper decline in smaller and
midsized projects during a recession rather than being the result of
consolidation. However, this time it could be different and the large
firms could permanently increase their market share.
their revenues from foreign projects. Look for that number, as well as
the number of U.S. contractors with international operations, to grow
in the lost-decade scenario.
So where on the world map would U.S. contractors be most likely to
plant their flag? Currently, the international revenues of the 22 American
firms who made the ENR Top 225 are distributed nicely geographically:
26% in the Middle East, 22% in Asia, 21% in Canada,
13% in Europe, 10% in Africa and 8% percent in Latin America and
the Caribbean. The same is true of their 67 European counterparts.
This makes it likely that American and European contractors may
increasingly join forces in order to compete more effectively abroad
and compensate for their depressed home markets. What may very
well distinguish the next decade from the previous two decades in
this respect is that this time American firms are as likely to be buyers
as sellers.
Small to midsize building and civil contractors are getting squeezed
in all sectors. Competition is up and margins are down. Large national
firms, particularly those with a desirable niche, continue to be
successful and profitable. In the lost-decade scenario, this trend will
probably continue due to consolidation among private customers
(like health care providers due to expanded health care regulations)
and design-build mega projects by public owners. Larger firms will
have a structural advantage.
U.S. contractors with a foothold in the international market would
be better-positioned to ride out the lost decade. Currently, this is a
relatively small group. Only 22 U.S.-based firms find a place among
the ENR Top 225 International Contractors. The combined revenues
of those 22 companies ($86.5 billion) are divided almost evenly between
the U.S. and international markets, 52% and 48%, respectively.
But that group statistic is misleading if applied to two-thirds of the
individual contractors in this group. The eight U.S.-based firms who
made ENR’s top 100 (Bechtel, Fluor, KBR, Foster Wheeler, Kiewit,
CB&I, McDermott and Jacobs) receive 62% of their revenues from
international markets, whereas the remaining 14 derive only 18% of
Canada remains a relatively strong market. Its growing P3 sector has
heightened competition among concessionaires and has drawn larger
American contractors as well. The industrial and infrastructure needs
of emerging economies will also help to compensate for the shortterm
decline of these sectors in the U.S. and the longer-term decline
in Europe as many projects there fall victim to austerity measures.
China has already surpassed the U.S. to become the world’s largest
construction market. India, which ranks fourth, is in the third year of
a $1.7 trillion construction program aimed at rebuilding its road, rail
and energy infrastructure.
The No. 3 construction market, Japan, will see its construction expenditures
rise as it rebuilds from the devastation of the March 2011
tsunami. However, Japan’s construction market essentially is not
open to foreign contractors, and anyone who studies the bizarre history
of the state-funded construction industry in that country will
understand why that is not going to change.
India and China could benefit tremendously from the technical skills
and project management capabilities of U.S. firms. Neither country is
easy to break into. China’s construction market, apart from complex
energy and chemical projects for which it lacks domestic capability,
is “very, very closed” to foreign contractors, as Balfour Beatty CEO
Ian Tyler bluntly put it in a recent interview. [12] Moreover, its loose
adherence to contractual terms makes it one of the riskiest markets
in the world to compete in, especially on mega projects that are
stretched out over a period of three to five years.
India is highly provincial itself and hampered by a burdensome bu-
11. Will Hill, Tim Sznewajs, and Sabine Hoover, “Study Reveals Trends in Industry
Ownership and Consolidation,” FMI Quarterly 2009, Issue 2, pp. 61-81. See especially
Exhibit 2, p. 63.
12. Peter Reina and Gary Tulacz, “With Traditionally Strong Markets in Decline, Firms Look
to Break Through in New Regions.” Engineering News-Record, 29 August 2011, p. 48.

10
The 2012 U.S. Markets Construction Overview
reaucracy and pervasive corruption. It has slowly been opening up
since 2005 when its government liberalized regulations of foreign
investment in its real estate and construction industries. Although
the corruption is too deeply rooted for anyone to expect it to disappear
in the near future, the issue was at the forefront of Indian media
coverage throughout 2011, and there is an increasing awareness that
a failure to deal effectively with the issue will seriously jeopardize India’s
rise among the world economic powers. Foreign participation in
major Indian construction projects still requires a joint venture with
an Indian firm. The relative absence of a language barrier (English is
a second language for most educated Indians) will facilitate participation
in these ventures by U.S. firms.
Scenario # 3:
Taking Our Medicine Sooner
Rather Than Later
Niall Ferguson is a rare breed: an academic, and an Ivy League academic
at that, who loves capitalism and believes colonialism was
a powerful force for good in the world. A British-born professor of
history and economics at Harvard University and Harvard Business
School, Ferguson has written a contrarian account of the rise and decline
of the British Empire that he believes contains a salutary lesson
for America. Great Britain, he argues, lost its empire because it lost
confidence in what had made it a great civilization. Instead of correcting
the abuses of colonialism (which Ferguson freely acknowledges),
it resorted, along with the rest of western Europe, to “imperial guilt”
and “self-flagellation,” and both England and the world were losers
because of it. [13]
What are the characteristics of contractors most likely to survive the
lost decade?
• Strong balance sheets and diversified experience.
• Strategic acquisitions at sensible multiples.
• Presence in health care, technology, energy or infrastructure.
• Ability to assume an equity position in P3 projects and/or
vertical integration into construction materials, especially
aggregates (this applies to infrastructure contractors).
• Organizationwide, operations-led business development
culture.
• Foothold in emerging international markets, with ability
to deliver complex energy and infrastructure projects or
contribute advanced project management capabilities while
establishing trusting, transparent relationships with native
contractors.
Ferguson believes America stands at a similar crossroads today. It is
the world’s only remaining empire, but it is ashamed of being an
empire – “an empire in denial,” he calls it. [14] Americans love their
country’s symbols but no longer understand or believe in the superiority
of their civilization. That is why, on the level of ideological
export, its leaders are content to offer the world vague concepts like
“democracy” and “freedom” but are unable to preach the personal
character traits that enable democracy and freedom to produce prosperity.
That is also why, instead of embracing capitalism and free
markets at home, the U.S. is turning in the opposite direction. “The
Chinese,” he remarked in a recent panel discussion “are more committed
to capitalism than we are.” [15]
Although empires usually decline gradually, Ferguson believes that
America’s massive public and private debt puts it in danger of rapid
economic decline. But even if it can bring its debt problem under
control, there remains a deeper issue that will ultimately decide
whether America remains a true world power or, instead, follows
the slow path of decline that Great Britain tread as the 20th century
progressed. That issue, he thinks, is whether enough Americans can
rediscover the values that made their country what it is, muster the
political will to remodel their institutions accordingly, and export this
vision with confidence to the rest of the globe.
13. Interview of Niall Ferguson by William Skidelsky, “Niall Ferguson: ‘Westerners don’t
understand how vulnerable freedom is.’” The Observer, 20 February 2011. http://www.
guardian.co.uk/books/2011/feb/20/niall-ferguson-interview-civilization.
14. Niall Ferguson, Empire: The Rise and Demise of the British World Order and the Lessons
for Global Power (New York: Basic Books, 2002), 317.
15. Panel Discussion at The Daily Beast’s Innovators Summit, New Orleans, La., 22
October 2010. http://www.youtube.com/watch?v=4mq9FKAm9qs, accessed September
8, 2011.

Section 1: State of the Economy
11
Ferguson is not the only notable economic historian who is challenging
global leaders to change their thinking about the root causes of
prosperity. One of the most fascinating and controversial scholarly
books to be published in recent years is Gregory Clark’s “A Farewell
to Alms,” a must-read for anyone interested in the future of globalization.
Clark, who chairs the Department of Economics at the University
of California-Davis, presents a wealth of historical data in an
attempt to answer the long-standing question of why the Industrial
Revolution and the unprecedented prosperity it generated occurred
in 18th century England, and nowhere else, and why this model of
prosperity spread to some parts of the world, but not others.
His answer is that neither personal freedom, the rule of law, free markets,
literacy, property rights or even technological advances prove
to be a satisfactory explanation. Those things were all important, but
they were only the preparatory soil. The seed that turned those ingredients
into a prosperity that otherwise would have never materialized
was a rapid shift (genetically driven by high fertility rates among the
upper classes, he believes) in the personal character of the average
Brit. “Thrift, prudence, negotiation and hard work were becoming
values for communities that previously had been spendthrift, impulsive,
violent and leisure-loving.” The extent to which this transition
has occurred in other societies, he argues, also explains the divergence
between developed and underdeveloped nations in the world
today. [16]
The implications of Clark’s conclusions for the economic future of
underdeveloped nations are disturbing, but this is largely because of
his view that these traits are more a function of nature than nurture.
But even if he is wrong on the nature versus nurture question, his
overall thesis remains highly relevant because if he is correct, it means
that it is naïve to assume that the mere dissemination of democracy,
freedom and technology will produce prosperity in emerging economies,
or that population growth driven by immigration – the situation
America and especially Europe are facing – automatically will
yield results that are similar to historical population growth that was
numerically equivalent but driven by native births.
Whatever one makes of Clark’s explanation for economic disparity or
Ferguson’s assessment of western imperialism, it is certainly true that
the November elections, as well as the elections that follow the rest of
this decade, will function as a forum in which American voters will
– whether they recognize it or not – register their verdict on the question
of what has made America great. Was it the New Deal, the Great
Society, social welfare, entitlement programs, a big federal government
and comprehensive regulations? Or the simple, constitutional
16. Gregory Clark, A Farewell to Alms: A Brief Economic History of the World. (Princeton,
N.J.: Princeton University Press, 2007), 166.
freedoms of the first 150 years of our Republic’s existence, with all the
personal risks and responsibilities entailed by that freedom? Or some
golden mean in between the two?
The likelihood is that American voters will aim for the last of those
three alternatives, and in that case everything depends on whether the
mean is really a golden one. Anything resembling that would require a
dramatic decrease in the size of the federal government, a huge scaling
back of federal regulatory agencies, a diminished role for the federal
judiciary, significant reductions in military spending, a shift in the balance
of regulatory power and a transfer of tax revenue and social welfare
to states and the private sector.
That may seem like a long shot, and it is. But remember that dramatic
changes of some kind will have to occur in order for the federal government
to achieve fiscal sanity. That is simple mathematics. Even on
the most optimistic growth projections, there is no way for the U.S.
to grow itself out of its deficit and unfunded liabilities. It cannot print
its way out of these problems without significant inflationary implications.
Nor can it tax its way out of these problems. Over the last six
decades, the ratio between federal income tax receipts and GDP has
fallen into a remarkably narrow range no matter what the marginal
taxation rate on the wealthiest Americans (see table on the following
page). The anticipated gains from higher taxes on the rich fail

12
The 2012 U.S. Markets Construction Overview
to materialize because of their negative impact on GDP. So another
year of economic doldrums, especially if it is combined with further
deterioration in Europe, may be just the catalyst U.S. voters need to
chart a markedly different course for the nation.
The resulting picture, however, may not be pretty at first. Unemployment
could rise as tens of thousands of government jobs are lost.
Housing inventory would grow still higher and home prices could
drop another 15% to 20%. Some banks would fail after realizing
huge losses in the value of their mortgage holdings. In view of these
and other implications, it is not hard to understand why politicians
have been “kicking the can down the road.”
Development of natural resources could be spurred dramatically by
a loosening of environmental regulations and, what would probably
accompany it, the opening of federal lands for natural resource development.
But most building construction activity in the U.S. would
decline sharply for several years, which means that the near-term
consolidation we outlined under the previous scenario would apply
to this scenario as well. The general decline in construction activity
could also extend to highway infrastructure spending, which, unlike
the lost-decade scenario, would not be exempted from a federal
downsizing of these proportions.
Federal Taxation Rate on Wealthiest Americans and
Its Effects on Federal Share of GDP
Years
1946-1951
1952-1953
1954-1963
1964
1965-1981
1982-1986
1987
1988-1990
1991-1992
1993-2000
2001
2002
2003-2010
Highest
Tax Rate
91.0%
92.0%
91.0%
77.0%
70.0%
50.0%
38.5%
28.0%
31.0%
39.6%
39.1%
38.6%
35.0%
Federal Income
Tax Receipts
as a % of GDP
16%
19%
18%
18%
18%
18%
18%
18%
18%
19%
20%
18%
17%
Assuming the country could stay this course, however (and that is
by no means a given), in the end, the pain would prove to be wholesome.
International markets would recover their confidence in the
dollar and, by consequence, since the dollar is presently the only viable
world currency, in the global economy itself. The average American
family would have fewer dollars, but the purchasing value of
those dollars would be higher. Capital transferred from the public to
the private sector would be vastly more productive. Cheaper home
prices would bring the housing cost-to-wage ratio – which is still at
an arguably high level – back to normal historical standards. It would
also establish a pricing bottom so that absorption of excess inventory
could begin in earnest. Above all, deregulation and the restoration of
more free-market conditions would encourage sustained, long-term
investment in the United States, which is the ultimate foundation for
a healthy construction market.
What are the characteristics of contractors most likely to survive this
scenario?
• Strong balance sheets and strategic acquisitions transacted at
sensible multiples.
• Presence in energy, technology, health care and natural resource
development sectors.
• Foothold in international markets to ride out the tough, early
years on the domestic front.
• Contractors who time the rebuilding of their organizations to
coincide with a strong U.S. recovery beginning in 2015 or 2016.
Thus, like the country itself, the U.S. construction industry finds its
short-term interests (from a demand point of view) to be at odds with
its long-term interests. We will have one or the other, but not both.
Scenario #4:
We Have Nothing to Fear but Fear Itself
So the final question becomes “Under what conditions could a positive
scenario take place?” Is there any evidence that suggests that
things could improve and our industry would return to a cycle of
growth? According to the National Association of Realtors (9/21/11),
existing homes sales rose 7.7% in August, which is an 18.6% increase
over August of 2010. The greatest year over year improvement came
in the hard-hit West and Midwest regions. The multifamily segment is
becoming active again, driven by both displaced single-family homeowners
and a new breed of owner that is more interested in lifestyle
and less in the responsibilities of ownership and maintenance. Some
would argue that the current glut of vacant homes will not appreciably
mute demand for multifamily housing. These are two different
things. The new breed of renter is not interested in mowing grass and
painting the siding. Otherwise, he or she would get a 4% mortgage
and buy it for a lower monthly payment. A distressed home likely
was maintained poorly for an extended period prior to foreclosure.
Thus, it is misguided to consider 10 million foreclosures as marketable.
Many already have been neglected for three to five years. They
will require significant repair or demolition, both of which contribute
to construction.

Section 1: State of the Economy
13
Put all the economic science and theory to the side for a moment.
Forget the supply versus demand-side debate. We know that perceptions,
feelings and expectations play a strong role in the economy.
Earlier this year, the economy showed signs of life. Consumer Confidence
rose to 70.4. By August, it had fallen back to a desperate 44.5.
We live in a time of 24-hour media and politically fueled “disasterspeak.”
Not surprisingly, the decline in Consumer Confidence coincides
with Washington’s debt ceiling debacle and the news coverage
of it. Consumers want to spend. In fact, retail spending in July was up
8.2% versus 2010. GDP continues to inch upward. “Employment”
is 90% of the workforce earning regular wages and receiving annual
raises. Record corporate profits are sitting on the sidelines just waiting
… and waiting. Americans want to believe, but beyond an economic
crisis, they see a crisis of leadership on both sides of the aisle.
Can we grow our way out of this problem without significant nearterm
pain? We do not think so but one thing is certain: The next few
years will be anything but dull.
Wallace Marshall is a consultant with FMI Corporation. He may be reached at
919.785.9279 or via email at wmarshall@fminet.com.
Randy Giggard is managing director of FMI’s Research Services Group. He may be
reached at 919.785.9268 or via email at rgiggard@fminet.com.
Lee Smither is a managing director at FMI. He may be reached at 919.785.9243
or via email at lsmither@fminet.com.
Let’s give some perspective to FMI’s forecast projections. In current
dollars, it would look much better. But let’s go the other way to constant
dollars (inflation removed). Then the construction put in place
forecast for 2014 is equivalent to:
• 1995 level for the residential sector
• 1996 level for nonresidential buildings sector
• Best year ever for the non-building sector
• 1998 level for total construction
Now the pessimist might say that is a lost decade. However, the optimist
will say that the decade that followed those benchmark years
was pretty good. Furthermore, our econometric modeling has historically
been accurate. We look at the correlation of economic variables
to changes in construction going back to the 1960s. As simple
as it sounds, the variable that correlates best, in every segment, is
population change.
U.S. Population
1996: 265 million
2014 (projected): 320 million
As an example for one sector then, nonresidential construction will
be back to the 1996 level (inflation removed) by 2014, but will have
the fuel of a 21% population increase driving growth. That is a significant
difference.
Let the foreclosure mess begin to sort itself out. Let the EU finally gain
traction on its recovery plan. Give consumers some sense that there is
a light at the end of the tunnel. Give corporations some modest confidence
that it is time to reinvest profits. Then perhaps we could see a
positive trend in growth for the economy and construction.

14
The 2012 U.S. Markets Construction Overview
Government Construction
Facing a Downturn
By Kevin Haynes, Brian Strawberry and Phil Warner
Spending for government construction, especially infrastructure construction,
is expected to decline, possibly sharply, as budget battles
continue to rage in Washington and spill over to every state in the
nation. Although federal spending for construction represents only a
small percentage of total annual construction put in place, the government
sets the tone for private spending and development. Government
spending also helps generate needed infrastructure funding for
the betterment of national transportation by providing better ports,
airports and highways to keep people and goods flowing throughout
the economy. More importantly, in times of recession, government
projects help stimulate the economy by providing needed jobs until
the private sector recovers from the economic shock. At least, that is
how the government stimulus should work.
With one crisis averted, we are now faced with the bulging national
deficit and falling federal budgets. As a result, the U.S. construction
market now faces not only depressed private investment but also
proposed cuts from the federal government. This is alarming, especially
for contractors focused on government work or many other
companies recently looking to federal spending for new project opportunities,
because private sector projects have been sparse. For
those that thought increased public spending would help to tide
everyone over until the private market recovered, they are now wondering
where the next project opportunities will be.
At the time of this writing, the House Appropriations Committee and
its Republican leaders are moving forward on their budget-cutting
pledge. Included in this pledge is the reduction in spending for several
construction programs (See Exhibit 1: House Appropriations).
The expected conclusion of the program for base realignment and
closure (BRAC), which began in 2005, will wind down in 2011. As
part of this program, the U.S. Army Corps of Engineers (USACE)
In our brief review of federal, state and local government construction,
we look at many of the problems facing governments under
budgetary stress and how needed public projects may or may not be
funded in the near future. There is a sense that we are facing a longterm
slowdown, while at the same time needs for public construction
are on the rise. The budget gap between available or planned funding
for public construction projects is large and growing; however, the
national political gap is even larger. That is the basis for ongoing unease
and sets an unharmonious tone for business everywhere.
Federal Government Construction Outlook
When the American Recovery and Reinvestment Act (ARRA) of 2009
was passed, it was with the hope that public investment would help
to lessen the significant blow that the U.S. was dealt from the economic
recession. The idea of “recovery” noted in the ARRA was that
helping to keep people employed and the country’s infrastructure
from falling apart would contribute to a return of private investment
and consumer spending. Funding from the act did help states avoid
even deeper crises in the last couple of years; roads and bridges continued
to be repaired and schools continued to be built and staffed.
However, while there is supporting evidence to show that the billions
of dollars spent through the ARRA helped to keep the recession
from becoming much worse, private sector investment in new capital
construction projects is not flowing back into the market as soon as
hoped.
Of the $787 billion stimulus bill, roughly $94 billion allocated for
construction has been spent or committed in the past three years.

Section 1: State of the Economy
15
House Appropriations
Program ($ millions)
DOD base realignment and closure
DOD family housing construction
DOD other military construction
VA major construction
DOE defense environmental cleanup
Corps civil works (regular appropriations)
Bureau of Reclamation water/related resources
Total
FY 2012
House
482
373
11,489
590
4,938C
4,768C*
822C
23,462
FY 2011
Enacted
2,482
357
11,933
1,076
4,980
4,857
912
26,597
% Change
-81
+4
-4
-45
-1
-2
-10
-12
Note: Amounts are rounded, *Excludes $1,029 million in emergency funding for
2011 storm and flood damage repair, C: Approved by committee, no floor vote as of
6/20/2011.
Source: House Appropriations Committe
Exhibit 1
$82 million. In addition, the House panel slashed the agency’s $869
million request for repairs and renovations by 68%. Because of these
reductions, the GSA is holding off on $480 million in DHS and FDA
construction projects, which it had planned to proceed with this year.
In June 2011, the House committee cleared a spending bill that covers
energy and water programs, which would reduce the USACE
regular civil works appropriations by 2%. However, lawmakers also
adopted an amendment that adds $1 billion in emergency aid for
the Corps to repair flood and storm damage. If combined with the
FY2012 budgeted civil works program, then total spending would
actually increase by nearly 20% in 2012. The added funding for the
Corps comes at the expense of another stakeholder group, as the
flood and storm damage appropriation is met with an equal decrease
of $1 billion from high-speed rail funding.
is executing $16 billion of military construction (MILCON) for 275
Army, 127 Air Force and 32 DOD BRAC projects. In addition to
engineering and construction management-related work, USACE
handles real estate acquisition and disposal, environmental services
and equipment, and furniture procurement. The Army has benefited
from a favorable bid environment and is on track to meet all of
its program milestones on time. As a result of this program nearing
completion, the DOD fiscal year 2012 budget for base realignment
and closure will be reduced by more than 80% of 2011 levels. In addition,
other military DOD construction, which makes up the bulk of
its construction program, will be down 4% in 2012. The one bright
spot for the DOD is in family housing where spending is projected to
increase by 4% in 2012.
Several other federal programs, including the Department of Veterans
Affairs (VA) and the General Services Administration (GSA), are bracing
for significant decreases in their construction programs. The Department
of Veterans Affairs has recently undergone its largest expansion
program since World War II. As
shown in Exhibit 1, its major construction
budget would decrease by
45%, based on the House’s recommended
construction cuts. The GSA
expects a similar decline and does
not project much construction down
Public Construction
the road, especially when compared
State and Local
to its recent level of activity. A 2011
Federal
Private Construction (FMI)
spending bill enacted on April 15 reduced
the GSA construction account
Total Construction (FMI)
for the current fiscal year by 91% to
The 2012 appropriations debate is far from over. Senate lawmakers
have taken no action to date on any of the 2012 spending measures.
However, we do know that there has been increasing pressure
to shrink the federal budget deficit. In addition, funding from the
ARRA, which has helped keep construction put in place for 2009
and 2010 from falling even further than the 10% to 15% dive the
construction market has experienced is now mostly gone. For those
companies and employees who depend on government funding for
most, if not all of their livelihood, this is an uneasy time. Nonetheless,
on a larger scale, while the proposed 12% reduction in federal
construction spending for fiscal year 2012 is significant, total federal
spending only represents roughly 3% of the total U.S. construction
market estimated for 2011. In all of the news and publicity surrounding
what occurs at the federal level, this fact can often get lost in
the shuffle. While federal construction gets the most attention in the
national news, the larger category of public construction is state and
local, which represents nearly one-third of total U.S. construction.
(see Exhibit 2) This is where our roads, bridges, sidewalks, water and
wastewater systems, courthouses, town halls, schools and parks are
constructed.
Value of Construction Put in Place — Seasonally Adjusted Annual Rate
(Millions of Dollars) as of Q1 2010
Total Construction
Put in Place
(Q1, 2010)
304,494
272,722
31,776
583,712
888,209
% Total Construction
Put in Place
(Q1, 2010)
33%
30%
3%
6%
100%
Total Construction
Put in Place
(Q1, 2011)
276,270
246,672
29,598
560,486
836,756
Exhibit 2
% Total Construction
Put in Place
(Q1, 2011)
33%
29%
4%
67%
100%
Summarizes FMI’s first quarter 2010 and 2011 construction put in place volume distribution by public and private markets.

16
The 2012 U.S. Markets Construction Overview
Construction Budget Challenges for State
and Local Governments
Much like federal construction, state and local construction spending
has declined more than $25 billion in 2011. While some of this
decline is due to decreased federal distributions to state programs,
reduced spending also ties to the way state budgets operate, how
state and local construction is funded, and why a stable economy is
needed to maintain a working balance between the public and private
markets.
The two primary sources of state revenues include personal and corporate
income taxes and/or sales taxes. Approximately one-quarter
of a state’s funds come from the federal government, and on average,
more than half of what a state spends each year goes toward education
and health care services. Payments for services normally are allocated
from a state’s general fund.
However, state and local construction are not funded directly from
the general fund, because states are required by law to maintain a
balanced budget. The typical and accepted practice to fund major
construction is to borrow through the sale of bonds and tie payments
to either revenues generated directly by the capital investment, a tax
collection vehicle (e.g., the general fund, state highway fund, etc.) or
a mix of both. During a recession, where the economy experiences
long periods of high unemployment, the impact quickly erodes state
and local tax collections.
Generally, and at the risk of an increased cost on debt, states must
first cover debt payment obligations. When states do not have revenues
coming in to cover payments for public services, service cuts are
necessary. The payments for public service are what states across the
nation have struggled with over the past four years, making cuts each
year more significant than the year before as budgets are forced to become
leaner. Again, in 2011 we have seen deep cuts into significant
public services, including public safety, education and health care –
services essential to the well-being of the state. Economic groups expect
2011’s cuts to hit the economy harder than any other prior cuts.
Interestingly, only a few states are using the traditional approach to
balance budgets by increasing/replacing lost revenues through new
or increased taxes.
Unlike the federal government, which is allowed to operate at a deficit,
states are required to cover their costs for the year based on annual
revenues. During times of recession, this can become, as we have
seen recently, counteractive to economic development. A balanced
budget forces a downward economic spiral at the state and local levels
as economic development becomes more and more unaffordable.
States are forced to rely on federal relief, much like the ARRA, to spur
development in the short term and hope that private investment returns
rapidly because of federal support.
Where ARRA failed was the slower-than-expected return of private
investment. While there was a lot of hustle and bustle over the billions
going into construction and development, much of the spending
that the stimulus provided was maintenance-related (e.g., department
of transportation paving work) and too little “stimulated” a
rapid expansion in the private sector.
From where we stand now, with all ARRA funds expired and little
to no discussion of short-term future federal support, state revenues
and the public service programs are in considerable distress. In 2012
some 42 states will be working to close $103 billion in budget gaps
on top of those shortfalls experienced between 2009 through 2011.
States are working on closing the gap using typical service cuts, new
taxes and reserve funds, all while trying to cause the least amount of
damage to the economy as possible.
The sharp falloff in state and local government spending leaves contractors
scratching their heads and asking themselves where the public
projects that have kept them afloat for the past three years have
gone. State and local owners are ultimately in a place where private
investment must return in order for their situations to improve. Private-sector
growth is the only sustainable way to increase revenues
from tax collections and regrow programs to the levels maintained
in 2007.
Last July, the Center on Budget and Policy Priorities reported that at
least 28 states recognized tax collections for the year-end 2011 that
exceed amounts expected in their revised budgets. This is good news
considering it may show signs of a long expected, albeit slow, rebound.
Much of the noted revenue improvements are tied directly to
gains associated with income tax collections, which, in effect, shines
some positive light on performance in the private sector. As with historical
recessions, trends show that the first sign of an economic rebound
is the increased income of the upper classes. What the report
on tax collections shows is between 2010 and 2011, income from
business ownership, rental property and investment dividends increased
more rapidly than income from wages, potentially indicating
signs that economic rebound is near and the private market is getting
ready to invest and grow again.

Section 1: State of the Economy
17
Seeking Alternative Funding —
P3s and Infrastructure Banks
Symptomatic of the cuts in government spending for construction at
all levels is the failure of Congress to pass a federal surface transportation
bill. The current bill, 2005 SAFETEA-LU law, expired September
30, 2009, and the latest reauthorization expired in September
2011. At this point, SAFTEA-LU will likely be transformed as current
discussions in the Senate and the House involve discussions on
whether the bill should cover two or six years and how projects may
be funded. For instance, the House bill recently introduced by House
Transportation and Infrastructure (T&I) Committee Chairman John
Mica, R-Fla., calls for more involvement of P3s (public-private partnerships)
and investments in state infrastructure banks; however,
that bill cuts current spending levels by 35% to around $27 billion
next year.
The identified and perceived needs for building and rebuilding the
nation’s infrastructure are tremendous. Those needs did not just surface
overnight. They have been there for decades, but with new calls
for sharply reduced government spending with no new taxes – or no
taxes at all seems to be the growing cry – the lack of funding for infrastructure
will become more of a problem in the coming years. Infrastructure
is only noticeable by the general public when something
fails, like a bridge collapsing or a water main erupting or gas main exploding,
causing death, destruction and disruption to our daily lives.
The dilemma we are facing is how to have our infrastructure without
breaking the budget. The solutions proposed are akin to looking for
a white knight and, lately, that white knight takes the form of P3s and
national and state infrastructure banks.
White knights are not what they used to be. For one thing, they
charge more; that is, they expect to make a profit on their rescue
investments. Private investors looking to participate in infrastructure
projects come in many forms, such as investment funds, private equity
firms, institutional money managers, pension funds, insurance
companies and wealthy individual investors. The one thing they have
in common is that they are all looking for long-term, low-risk investment
streams – the type of return one might see from building and
operating a toll road or a tolled bridge in high-traffic zones. Therefore,
one of the requirements for likely P3 projects is a revenue stream
that is profitable over the lifetime of the project. Toll roads are not the
only means of revenues; P3 investors may receive revenues from a
variety of sources or a mix of tolls, taxes, interest on bonds, etc. The
governments seeking to fund and build the projects may participate
as investors as well, but they invest their tax receipts or tax reductions,
land and right of way or other concessions. One of the primary
benefits sought in this complex relationship is the idea that private
organizations can get projects built faster and for lower cost than government
entities with a lot of bureaucracy and insufficient numbers
of qualified personnel for project oversight.
While more states are allowing P3 financing, the deals are complex
and not easily understood by anyone without a degree in high finance.
This makes it difficult not only to get public approval, but
also tough to establish a consortium for the project and get all the
public and private parties together and in agreement. P3 projects are
also not immune to the economic slowdown; for instance, consider
the example of a toll road – a project made easier to justify with
the increase of the EZ-Pass system. As recessionary pressures continue,
fewer people are commuting to work or are just reducing unnecessary
trips. Private investors counting on that revenue stream to
justify their risk will seek other sources of guaranteed revenues. For
instance, the Florida I-595 P3 project entails a 35-year concession for
a 10.5-mile stretch of highway north of Miami. Funding of the $1.8
billion project is a mix of bank debt; TIFIA (Transportation Infrastructure
Finance and Innovation Act) lending, Florida Department
of Transportation funds, equity investment and toll revenues.
The move to greater use of P3 project funding methods will be slow,
but the concept and its many permutations are beginning to gain
traction in the U.S., as witnessed by a number of large projects approved
or in process around the country. For instance, a consortium
formed by Macquarie and Skanska, called Elizabeth River Crossings
(ERC), has agreed to commit $318 million in equity and $495 million
in debt toward the project, according to a presentation on the
business terms provided by Virginia’s Office of Transportation Public-
Private Partnerships. The private developers are expected to commit
$1.2 billion of construction and financing costs at financial close
and $1.3 billion in operation and maintenance costs over the 58-year
concession term.
Here is a sample list of current projects from a longer list of P3 projects
assembled by the National Conference of State Legislatures,
“Public-Private Partnerships for Transportation: A Toolkit for Legislators.”
• $3.8B project for Indiana Toll Road, Ind., Indiana Finance Authority,
75-year lease, Cintra Concessions/Macquarie
• $2B I-495 Capital Beltway HOT Lanes, Va., Virginia DOT,
DBFO, Transurban/Fluor ($1.4b Fluor/Lane)
• $1.7B Hudson-Bergen Light Rail, N.J., N.J. Transit DBOM258,
Wash. Group/Itochu ($1.15b Perini/Slattery)
• $350M Dulles Greenway Toll Road, Va., TRIP II DBFO, TRIP II
($150m Brown & Root)

18
The 2012 U.S. Markets Construction Overview
P3 projects are not confined to mega-highway projects, but these are
projects most likely to attract private investment at this point and also
the projects that most need investment from the public sector. Often,
public projects that would normally be funded piecemeal over many
years can be combined into larger P3 projects and completed long in
advance of what the public sector could do on its own.
Another funding vehicle that might include private investments and
P3s is the idea of a national infrastructure bank. One bill currently
before Congress is H.R. 402, the ‘‘National Infrastructure Development
Bank Act of 2011.’’ The bill is proposed “to facilitate efficient
investments and financing of infrastructure projects and new job
creation through the establishment of a National Infrastructure Development
Bank, and for other purposes.” It would be established
as a wholly owned government corporation for a limited time, 15
years, and have a board appointed by the president. The NIB would
be funded by a variety of public and private sources, including seed
money from the federal government:
The capital markets, including central banks, pension funds,
financial institutions, sovereign wealth funds and insurance
companies, have a growing interest in infrastructure investment.
The establishment of a United States governmentowned
institution that would provide this investment opportunity
through high-quality bond issues that would be used
to finance qualifying infrastructure projects would attract
needed capital for United States infrastructure development.
(Bill H.R. 402)
The needs for infrastructure development in the U.S. identified in
the bill are staggering, and various associations and institutions, most
notably the American Society of Civil Engineers (ASCE), have published
most of their cost estimates. Comparing those numbers with
current levels of construction put in place for the U.S., we can get an
idea of how much more construction work will be needed to build
infrastructure at the rate suggested by the several reports. (See Exhibit
3. Note: The comparisons are approximate only as CPIP catego-
ries and identified needs may differ in project type and reporting.)
Consider also that the deficit may increase if governments cut spending
back to maintenance levels in several of these categories, as has
been proposed in recent budget debates.
The idea of a National Infrastructure Bank has been considered for
some time now. At the state level, State Infrastructure Banks (SIBs)
have existed in one form or another since around 2005 when the
federal highway authorization bill, SAFETEA-LU, provided a means
of establishing such banks to fund highway projects from federal and
state funds. SIBs, with few exceptions, are targeted at helping cities
and communities fund transportation projects, and, unlike the NIB,
will fund smaller projects. They provide low-interest, or no interest,
loans and often tax incentives to help projects that otherwise would
be shelved due to funding difficulties.
There are a number of detractors, especially for the NIB, with criticism
including the problem that the banks would not act like private
banks in that they are not required to break even or make a profit.
The loans or grants also have social requirements attached in addition
to other technical requirements needed to meet eligibility. For
instance, for transportation projects, “the Board shall consider the
following:
(A) Job creation, including workforce development for women and
minorities, responsible employment practices and quality jobtraining
opportunities.
(B) Reduction in carbon emissions.
(C) Reduction in surface and air traffic congestion.
(D) Poverty and inequality reduction through targeted training and
employment opportunities for low-income workers.
(E) Use of smart tolling, such as vehicle miles traveled and
congestion pricing, for highway, road and bridge projects.
(F) Public health benefits.” (Bill H.R. 402)
Generally, these requirements should not be surprising, as most government
contracts include such desiderata now. However, in the cur-
Exhibit 3
Identified Infrastructure Needs
Organiztion or Institution Estimating
Infrastructure Needs
American Society of Civil Engineers (ASCE)
National Surface Transportation Policy and
Revenue Study commission
Environmental Protection Agency
Environmental Protection Agency
Edison Electric Institute, electric power industry
Amount
$2,200,000,000,000
$11,250,000,000,000
$334,000,000,000
$202,500,000,000
$298,000,000,000
Total
Time Frame
in Years
5
50
20
20
20
Annualized
Estimated
Spending Needs
$440,000,000,000
$225,000,000,000
$16,700,000,000
$10,125,000,000
$14,900,000,000
$706,725,000,000
Est. 2011
Infrastructure
Construction Put
in Place (CPIP)*
$261,225,369,030
$85,494,464,244
$15,732,037,728
$26,937,630,720
$86,417,842,500
$475,807,344,222
Difference Per
Year (Shortfall)
$178,774,630,970
$139,505,535,756
$967,962,272
$(16,812,630,720)
$(71,517,842,500)
$230,917,655,778
Notes on Needs
“to meet adequate conditions”
“for the next 50 years to upgrade our surface transportation system to a
state of good repair and create a more advanced system”
“to ensure the provision of safe water”
“for publicly owned wastewater systems-related infrastructure needs”
“for Nation transmission system ‘in order to maintain reliable service.’”
*The construction needs identified and CPIP estimated are not entirely comparable, and CPIP represents both public and private spending. Reference Source: Congressional Bill H.R. 402, January 24, 2011

Section 1: State of the Economy
19
rent political environment, the NIB bill is likely to be shot down or
greatly modified. Nonetheless, a National Infrastructure Bank is one
more possibility to help meet the needs of the nation’s infrastructure.
A better way to increase infrastructure investment would be for the
economy to return to pre-recession spending levels with an improving
economy generating greater tax revenues even without raising
taxes. The problem is that the desired growth rate the country needs
in order to keep up with population growth and to maintain current
levels of quality of life, etc., will not occur until we have more jobs
like those created by building more infrastructure. Therefore, we are
caught in a bind with no white knight in sight. The message on government
spending for construction is mixed and the challenges are
great. The solutions will need to be equally great.
Kevin Haynes is a senior consultant with FMI’s Research Services Group and can
be reached at 919.785.9275 or via email at khaynes@fminet.com.
A Recovery Without Housing?
By Richard Tison, Phil Warner and Randy Giggard
Former U.S. President Herbert Hoover once quipped, “Please find
me a one-armed economist so we will not always hear ‘on the other
hand’ ...” A review of economists’ current perspectives on the economic
recovery and the conditions of the U.S. housing market offers
clear signs that Mr. Hoover was unable to shift the norm away from
two-armed economists.
“On the one hand, the possibility remains that the
recent economic weakness may prove more persistent
than expected and that deflationary risks might reemerge,
implying a need for additional policy support.”
Brian Strawberry is a research consultant with FMI’s Research Services Group and
can be reached at 919.785.9246 or via email at bstrawberry@fminet.com.
Phil Warner is a research consultant with FMI. Phil can be reached at
919.785.9357 or via email at pwarner@fminet.com.
“On the other hand, the economy could evolve in a way that
would warrant a move toward less accommodative policy.”
Ben Bernanke, semiannual monetary policy report
to Congress, as quoted in CNN Money, July 13, 2011
While economists do not always agree on the future of the economy,
one thing is certain. Although the Great Recession is officially over,
the turbulence of 2011 offered few signs of relief for the nation’s
households and businesses, whose interconnected stories are the
building blocks of the economy. Many of the same structural challenges
facing the U.S. economy at the end of the recession remain
roadblocks to recovery. Unemployment is too high. Banks continue
to hold onto money. The housing market is still a mess.
The recovery from the previous recession of this century resulted
from strong consumer spending and a robust housing market. This
time around, neither of those sources appears ready to lead us forward.
The housing market remains especially challenged. Due to the
depths to which that market fell – and in large part still remains – it
now acts as a ball and chain, dragging down the rest of the economy,
depressing the consumers’ ability to spend, businesses’ desire to invest
and the financial market’s ability to lend.
What does this mean for recovery? Does the traditional link between
residential and nonresidential construction still apply? If so, what is
the implication of the link on a broader economic recovery without a
housing market recovery?

20
The 2012 U.S. Markets Construction Overview
It is our sincere belief that the economy can recover without a housing
market recovery, albeit more slowly. Moreover, the lack of a housing
market recovery will affect how and to what extent the economy
recovers.
To explain this belief, we will review where the economy currently
stands with regard to GDP and unemployment, the challenges of the
housing market and the implications of a down housing market on a
broader recovery. Then we will present what we believe is down the
road for firms in the construction industry.
Getting Back to Normal
What Is Normal Anyway?
Prior to the Great Recession, from 1993-2007, real GDP grew at an
annual rate of 2.8%. By those standards, a return to approximately
3% annual growth in real GDP would be “normal.” Unfortunately,
during the Great Recession, real GDP declined at an average annual
rate of 2.7%, according to data released by the Bureau of Economic
Analysis.
What does this mean? Growth needs to exceed 2.8% in order for the
U.S. economy to recover ground lost during the recession. Despite
growth of 3% in 2010, economic growth has slowed in the first half
of 2011 to only 0.4% in the first quarter and 1.3% in the second
quarter, seasonally adjusted at annual rates. [1]
For evidence of the effects of this gap, look no further than the labor
market. The unemployment rate remains stubbornly fixed at around
9% and appears ready to remain at that level for some time. To declare
the labor market healthy again, that stronghold must give way
to a lower rate approaching full employment.
The rate of unemployment consistent with “full employment” varies
from one economist to the next, with a range of approximately 4% to
6%. According to Bureau of Labor Statistics (BLS) data, the average
rate of unemployment in the U.S. from 1993 to 2007 was 5.2%, just
more than half of what it has been throughout most of the recession
and into 2011. With that in mind, a target unemployment rate for a
“normal” labor market in this economy would be getting below 6%.
What will it take to accomplish less than 6% unemployment? First,
as the U.S. population is growing, there must be enough job creation
to account for that growth. With an overall population growth rate
of approximately 0.9%, a population of around 311 million based
on the 2010 census, and a workforce of approximately 150 million
according to the BLS, the U.S. economy must create around 1.35 million
jobs per year, or 115,000 per month, just to keep the unemployment
rate constant. Further job creation is then necessary to reduce
unemployment toward and below 6%. The Bureau of Labor Statistics
shows the average monthly job growth from January 2010 to July
2011 was only 98,000.
Today, there is a 10% gap between where real GDP would be if the
recession never occurred and where we are right now. As opposed
to real GDP being 9.8% higher than in Q4 2007, it is actually 0.2%
lower than it was in Q4 2007. While 3% real GDP growth would not
quickly diminish the gap, it would at least be a step toward “normal.”
We are a long way from closing that gap.
1. According to data released by the Bureau of Economic Analysis after the second quarter
of 2011: www.bea.gov; National Income and Product Accounts Gross Domestic Product:
Second Quarter 2011 (Advance Estimate), Revised Estimates: 2003 through First Quarter
2011.
Even more disheartening is what the unemployment rate hides –
those no longer in the labor force but able to work and those underemployed.
The unemployment rate excludes those not actively
looking for work. As the jobless recovery grinds along, the median
number of weeks that the unemployed are out of work is increasing.
From approximately two months before the recession, this figure has
grown to a staggering six months at the midpoint of 2011. [2] As
2. National Economic Trends, August 2011, Updated through 8/11/2011, Federal Reserve
Bank of St. Louis: http://research.stlouisfed.org/publications/net/.

Section 1: State of the Economy
21
this figure increases, more and more people are simply giving up the
search for work and dropping out of the labor force. This has the
effect of decreasing the unemployment rate, all else held constant.
The unemployment rate also does not differentiate between workers
employed at their fullest potential and those employed at a level
below that potential. Laid off and unemployed workers seeking employment
since the beginning of the recession found far fewer opportunities
than before the downturn. As some income is certainly
better than no income, many had to settle for positions below their
qualifications.
With sluggish GDP growth and stubborn unemployment, it appears
that “normal” is a long way off. Then again, something has to give.
Something always does. Following the recession of the early 2000s,
that something was the housing market. Can the housing market
again lead us in economic recovery? Despite the usual effect of population
growth to increase demand for residential construction, the
structural issues facing the housing market make it unlikely that it
will rebound in the near future.
Why the Housing Market is Unlikely to
Recover in the Near Future
Population growth is traditionally a driver of demand for residential
construction. Current U.S. population growth, however, is not having
this effect for a variety of reasons. First, although our population
is growing, household formation is not keeping pace to the tune of
200 million fewer households than one would expect given population
growth. It is understandable that household formation would
not keep pace with population growth during the recession. New
college graduates, having a hard time finding jobs, end up back at
home with their parents instead of on their own; people previously
living alone are seeking roommates to cut down on the cost of living
because their wages are dropping.
The question that remains is: Will this trend reverse itself once the
economy improves, or is this a shift in the “American Dream” and
its implications for home ownership? A survey by the National Association
of Realtors found that 72% of renters still view home ownership
as a top priority. [3] The relationship between dream and reality,
however, has yet to play out. If household formation catches up to
population, as some economists expect, then population growth is a
ray of hope in an otherwise grim market.
While population growth is a potential sign of hope for the future of
the housing market, the other hand, in this case, is excess inventory
and the problem of shadow inventory, which are the dark, ominous
clouds overhead. As of June 2011, data released by the National Association
of Realtors shows that inventory in the housing market rose
3.3% to 3.77 million units, which represents 9.5 months of inventory
at current sales rates. While this is down from its height during the
recession, it has risen throughout 2011.
Shadow inventory poses another challenge for the supply of homes.
The shadow inventory consists of foreclosures and those about to
enter foreclosure as well as owners who want to sell but are waiting
for the market to improve. According to a study released by Standard
& Poor’s, this inventory stood at $405 billion during the summer of
3. “Home Ownership Remains an American Dream,” Kenneth Leon, S&P Equity Research
Services.

22
The 2012 U.S. Markets Construction Overview
Housing start statistics offer further evidence of
the differences in the housing market during and
after the past two recessions. During the 40 years
prior to the 2001 recession, housing starts averaged
1.5 million units annually. While this number
usually falls during a recession that was not the
case in 2001. In 2001 low mortgage rates, house
price appreciation and poor performance of other
investment alternatives combined to shift personal
investment toward housing, which maintained the
average level of annual starts at 1.6 million, despite
the recession. [5] The Great Recession, on the
other hand, saw housing starts drop precipitously.
During the first half of 2011, single-family housing
starts averaged an annual rate of only 426,000,
based on U.S. Census Bureau data.
As the data regarding the housing market during
and shortly after the last two recessions could hardly
look much different, it is clear that housing is not
following the same trajectory. The availability of
cheap credit that fueled housing during the recession
of the early 2000s was a catalyst for the bubble
that burst, leading us into the Great Recession.
2011, which represents four years of housing inventory. [4]
The weight of slow household formation and excess and shadow inventories
is easy to see in the traditional housing market indicators
of home prices and housing starts. A look at how these indicators
differed through the past two recessions shows a market on two different
trajectories.
Unlike the previous recession of the 21st century where the housing
market led us out of recession, this time around it led us into recession.
While home prices rose during the previous recession, they
continue to fall after the Great Recession. Home affordability indices
show housing is affordable for those in a position to buy. According
to the NAHB/Wells Fargo Housing Opportunity Index in August
2011, 72.6% of new and existing homes sold in the second quarter of
2011 were affordable to families earning the national median income.
While what goes up must come down, and presumably,
what goes down will eventually come
back up, the housing market shows no signs of recovering
any time soon. In that case, where will the
growth come from, and what does this mean for
the rest of the economy and, specifically, nonresidential
construction?
What Does This Mean For the
Rest of the Economy?
In essence, the economy of any nation is a circular
flow of income between firms and households.
Firms employ people to produce goods and provide
services. This process, in turn, creates household
income, which allows households to spend.
Household spending gives firms a reason to exist
and fulfill consumer demand.
4. U.S. Residential Performance Index: “The Housing Market Recovery Moved Inches In
The First Half of 2011, But It Still Has Miles To Go.”
5. “Economic Conditions During the 2001 Recession,” Washington
State Office of Financial Management, July 2002.

Section 1: State of the Economy
23
While this simple view helps illustrate the circular nature of the
economy, the real world is more complex than this. To the simple
diagram, we need to add taxes, government spending and saving,
private saving and the many marketplaces in which these exchanges
occur. To understand the role of housing on the broader economy, we
will look at some macroeconomics and how the major components
of GDP interconnect.
Problem Solved? Not Quite.
The economy, as measured by GDP, is a combination of four components:
private consumption, business investment, government
spending and trade. Expressed as a formula:
GDP = C + I + G + NX
C = Private Consumption
I = Investment
G = Government Spending
NX = Net Exports, or Exports Less Imports
A quick rundown of the components offers few signs of hope for
sources of growth in our current economic situation. Consumers, still
cleaning up bad household balance sheets, are unlikely to increase
spending enough to move the consumption needle (C or negative C)
to the plus side of the equation. Government spending is certain to
drop, as 42 out of 50 states are grappling with budget shortfalls, and
the federal government is likewise pledging to slow its credit-fueled
spending spree (negative G). Economists expect exports to grow as
demand from emerging markets continues to increase. On the other
hand, they say the same for imports, meaning the net effect (NX) will
be at best zero. The last source of growth then is investment, which
is a combination of business investment and residential construction.
Considering the current shape of the housing market previously discussed,
that leaves businesses to get our economic model moving in
the positive direction.
Profits have risen since the depths of the Great Recession because
of reduced costs (i.e., unemployment) and increased productivity.
In some ways, the cyclical nature of the economy is slowing as the
financial markets and firms are not passing through their gains and
profits to the factor markets in the form of labor, which then becomes
household income.
While profitability keeps cash available on corporate balance sheets,
we are not seeing much of that cash put to good use. It is likely this
trend will continue without first addressing the sources of political
and economic uncertainty that are making businesses think twice
about spending.
A major question that businesses face is: Where is the demand?
Changing consumer-spending habits, high unemployment and the
challenges of the housing market all negatively affect demand for the
goods and services that businesses produce. Without growing demand,
business will continue to maintain current levels of production
without tapping into the labor market. In turn, wages will continue
to stagnate, and the unemployment rate will remain stubbornly high
as demand for labor remains flat. Unfortunately, households need
jobs before consumption can rise, and businesses need households
to consume for hiring to make sense. The vicious cycle perpetuates.
In the past, credit card borrowing and home equity loans helped consumers
to break out of this cycle. With homes under water and credit
cards more than maxed out, that route is closed. We can expect little
help from consumers spending their savings. The personal savings
rate, while still low, has begun to improve since the recession. However,
sharp drops in the stock market and inflationary dollars and
rising prices threaten to erode whatever people can sock away.

24
The 2012 U.S. Markets Construction Overview
The Role of Housing Throughout the
Economy
What Does This Mean for
Nonresidential Construction?
Housing plays a role in determining GDP growth or decline. As
housing is unlikely to grow any time soon, its role in increasing
GDP is unlikely. The role of housing, however, is more than
just its direct contribution to GDP. As the Great Recession tragically
illustrates, housing plays a key role in household wealth,
labor mobility, government policy and business investment decisions.
The implosion of the housing market left evidence of
its importance throughout the U.S. economy. Cleaning it up,
much like cleaning up the oil spill in the Gulf, involves more
than just picking up the pieces of the housing market to restore
the ecosystem to its original state, if that is even possible. Another
similarity to the oil spill is that the cleanup process will
take a long time.
Home equity is a significant driver of household wealth. The
drop in home prices caused by the housing bubble created
a decline in household wealth. The decrease in household
wealth, in turn, affects businesses, because as wealth decreases,
consumers tend to slow consumption in an attempt to make
up for the loss. The dual story of firms and households again
shows signs of weakness.
People are a key driver of demand for nonresidential construction
in all markets. As such, there has traditionally been a link between
residential and nonresidential construction. As population increases,
so, too, does residential construction. As residential construction increases,
so, too, does the construction of malls, schools, hospitals,
roads and utilities. Now that residential construction is likely to be
depressed for years, what does that mean for the demand for nonresidential
construction, which has shown some signs of improvement?
According to feedback to FMI’s NRCI (Nonresidential Construction
Index, Q3, 2011) panel, views on the effect of the housing market on
nonresidential construction were mixed, with 23% believing the link
between residential and nonresidential construction to be broken,
32% believing the link is still strong, and 37% believing the link has
weakened.
In addition to lower wealth, the housing market is affecting mobility
as some homeowners’ mortgages are under water while
others looking to relocate are waiting for market conditions to
improve before doing so. The effects on labor mobility are evident
in the labor market.
The condition of the housing market also affects government
finances. Through Fannie Mae, Freddie Mac and the Federal
Housing Administration, the government owned 250,000
homes at the end of June 2011 with another 850,000 in some
stage of foreclosure. [6] Creative solutions to lowering this inventory,
such as selling bundles of homes to convert them into
rental properties, are on the table, but in the near future, these
agencies will have to carry the burden of bulk home ownership.
6. Timiraos, Nick. “Housing Plan Gets A Mixed Response,”
Wall Street Journal, August 11, 2011.

Section 1: State of the Economy
25
Panelists’ views on which nonresidential markets negatively have been
affected the most by the down housing market are not as divergent.
Commercial construction tops the list, while utilities, health care and
infrastructure round out the bottom of the results. As the growth of
new developments slows, it is intuitive that demand for some forms
of nonresidential construction will slow. On the other hand, factors
such as population growth and deteriorating infrastructure are driving
demand for other nonresidential construction markets.
As the effect of the housing market on nonresidential construction
varies across industries, the condition of the housing market also varies
across geographies. By the end of May 2011, the S&P/Case-Shiller
Home Price Indices composite of 10 and 20 cities had experienced
33% declines from peak to trough. Each had also experienced 1.5-
2% recoveries from recent lows. For their similarities, these composites
mask geographic variations. For example, while San Francisco
and Tampa experienced index declines of 46.1% and 47.5%, respectively,
San Francisco had recovered 14.2% since recent lows, while
Tampa had not recovered at all.
Signs of Hope?
While residential construction is in poor shape, signs of a weakening
link between residential and nonresidential construction may be a
sign of hope. Demographics are driving demand for health care, education
and improving infrastructure, which all offer opportunities for
growth in nonresidential construction. In addition, all of the above
can create opportunities for employment, which in turn, could begin
to reinvigorate the economy’s circular flow.
On the other hand, who is going to pay for the projects that would
fulfill this demand? National, state and local governments have depleted
budgets, and while demographics would say that demand is
increasing, are consumers willing to pay, either through consumption
of services or higher taxes, to cover the costs of investments in education,
health care and infrastructure? There is a funding continuum.
Some projects will be funded; others will not. With an election year
around the corner, an expansive ideological divide and politicians
with heels well dug in for a fight, political resolution will come in a
way that is protracted and painful and will likely fall short of optimizing
economic recovery.
Richard Tison is a research consultant with FMI and can be reached at
919.785.9237 or via email at rtison@fminet.com.
Phil Warner is a research consultant with FMI. Phil can be reached at
919.785.9357 or via email at pwarner@fminet.com.
Randy Giggard is managing director of FMI’s Research Services Group.
Randy can be reached at 919.785.9268 or via email at rgiggard@fminet.com.

Stakeholder Trends SECTION 2

Section 2: Stakeholder Trends
27
New technology and processes continue to shape the way projects
are designed and delivered today. As pressures mount to keep project
costs down and increase efficiency, design firms and contractors alike
have embraced Building Information Modeling (BIM), lean construction
and Integrated Project Delivery (IPD) as tools for more efficient
execution. Prefabrication and modularization are becoming more
prevalent for trade contractors as they search for production gains as
their labor force shrinks. Improving business development processes
as well as the results, has become a priority for many companies as
they compete for hard-won market share.
In this section, we attempt to paint a clearer picture of the current
industry environment for each constituent as we examine these and
other more pertinent trends.
Architects/Engineers/
Constructors (A/E/C)
By Louis Marines, Steven J. Isaacs, Karen L. Newcombe,
Michael Landry, Grant Thayer and Hunt Davis
Over the past three years, design firm leaders have gone from ensuring
survival during a deep recession to guiding firms through an
exceptionally slow and flat recovery. No one at this time expects a
normal rebound from this recession, and the current pattern of small
steps forward alternating with jolts backward, is widely projected to
continue for at least the next year.
To maintain our understanding of conditions facing engineers and
architects, FMI conducts ongoing surveys throughout the year. Recently,
we have conversed with CEOs, presidents and other senior
executives of consulting design firms about the greatest challenges
facing them through 2012. The six major trends we have identified
as a result of these interviews and related surveys are:
1. Project funding
2. Evolving delivery methods
3. Competition
4. Finding and retaining staff
5. Technology driving change
6. Industry consolidation/merger and acquisition activity
Project Funding
The greatest challenge facing firms today, and likely through at least
2013, is finding funding for projects. With the economic recovery
moving like a slow-motion roller coaster, CEOs report to us that
projects start, stop, are put on hold for indefinite periods, then start
again with little warning when funding comes through. Reports on
the deterioration of the nation’s infrastructure continue to appear
regularly, yet little work is expected while tax coffers remain low.
Terry Neimeyer, CEO and chairman of the board of KCI Technologies,
Inc., told FMI that, “Our transportation sector used to lead our
company in growth and profitability. Today, it lags our other businesses,
as project-funding issues have caused many state DOTs to reduce
their programs. Given a lack of a robust federal [transportation]
bill, the outlook for the future is not promising.”
The funding picture is complicated further by pending federal agency
budget cuts. An August 2011 analysis by Deltek, Inc. projects that
the federal budget for architecture and engineering services will grow
slowly between now and 2016, with the current budget of $8.1 billion
expected to rise slightly to $9.5 billion over the next five years.
While overall construction budgets will be cut by $2 billion in 2012,
two areas will see increases: Health facilities and veterans hospitals
will grow from $1.81 billion to $3.06 billion, and projects supporting
energy initiatives will rise from $7.41 billion to $10.47 billion. These
numbers align with the perception of the CEOs who spoke with us
in the first quarter, many of whom said that health care and energyrelated
projects seem to have readily available funding.
When federal funds are lacking, can communities find alternative
methods of project financing? If those methods happen to include
tax hikes, will voters accept those increases? Kenneth M. Wightman,
CEO of David Evans Enterprises, Inc., Portland Ore., says, “From a
project funding perspective, a good percent of public-sector work is
stressed due to the lack of private development. Typically, this development
generates tax revenue, which feeds back into local, state and
federal budgets, and then back into the agencies who hire engineers
and architects. We expect that through 2012 on into 2013, funding
for public projects will remain flat. Contributing to this problem
at the federal level, the partisan bickering and entrenched positions
within Congress are leaving the country unable to create jobs through
reasonable tax increases. Transportation infrastructure work is being
held up by outdated gas taxes that have not been raised since the
early 1990s. Fortunately, the local populaces in Oregon and Washington
have supported tax increases when they can see a relationship
to specific projects that will benefit their communities or the states’

28
The 2012 U.S. Markets Construction Overview
economies.” This civic-mindedness is not new in the U.S. On November
4, 1930, one year into the Great Depression, voters in the
San Francisco Bay area went to the polls and put their homes, farms
and business properties up for collateral to support the $35 million
bond issue that financed the construction of the Golden Gate Bridge.
Alternative project funding methods continue to gain ground.
President and CEO of the American Consulting Engineers Council
(ACEC) David Raymond recognizes this shift and calls for continued
advocacy of public investment in infrastructure: “As government
budgets for public works continue to be constrained, we see growing
interest in public-private partnerships (P3s), infrastructure banks,
new forms of bonding authority and other mechanisms that facilitate
project financing by bringing in private capital, shifting risk and
monetizing infrastructure assets. At the same time, we must recognize
that private investment alone cannot overcome the tremendous
funding gap we have between current levels of public investment and
what is needed. Therefore, we must continue to advocate for sizable
public investment in core programs to sustain and improve existing
infrastructure as well as to leverage public funding to generate
supplementary private investment.”
Evolving Delivery Methods
“Delivery methods are evolving – if you do not have full life cycle
abilities, you are stuck and cannot have control of the market,” said
one of FMI’s survey participants. Although it is not new, design-build
is back on the front burner for clients due to the cost savings associated
with this method. Public-private partnerships were mentioned
in many interviews, but one firm with experience in P3s asserts that
the entry costs and risk may be too high for many firms to take on.
“Our firm is one of a handful of firms with the funding to be able to
get into P3s. The financial risks are high, but we are pursuing it …
The process to get in and the risk you have to cover, the terms and the
timing are significant impediments. If you win, it’s great.”
Someone is winning these projects, though cost may not be the only
barrier to entry. Terry Neimeyer notes, “The trend of P3s as a way to
increase project funding is good. However, P3s tend to exclude many
engineers who are not familiar with the large contractors and financiers
who make the selection decisions. Regardless, this is a good
trend, but we all must remember that P3s will not apply to freeways
and require a revenue stream (tolls) to pay out the debt and concessionaire.”
Peter Beck, CEO of The Beck Group, agrees. “P3s have enormous
potential, but are typically best for projects of $300 million and up,
where the cost of papering the transaction can be justified.” Peter
suggests that, “We may eventually develop standards like Canada
has that allow municipalities to get smaller projects done using P3s.
Canada’s standardization of P3 contracts has made this possible, but
we have not yet achieved this in the U.S.”
BIM as a design tool will also have large impacts on project delivery,
yet it is early in BIM’s development and some executives are uncertain
how best to implement it or where it will lead. Many construction
managers as well as specialty contractors have embraced BIM, as have
enlightened owners who have witnessed the benefits of better clash
detection, improved project planning and fewer change orders. In a
recent McGraw Hill Construction survey of AGC BIM forum members,
Gilbane Building Company “saw a nearly 1,500% return on its
BIM-related expenses” on a recently completed 96,000-square-foot
data center. “With 1,445 clashes detected before crews even got in
the field, Gilbane saw a 43% reduction in anticipated requests for
information … that could have cost the owner roughly $863,000.” [1]
Integrated Project Delivery (IPD) continues to gain ground, and Peter
Beck offered FMI his perspective on the changes that IPD may bring
about: “In our minds IPD is a half-step toward where the industry
needs to go. One of the problems we have as an industry is the difficulty
of aligning motivations between the disciplines using contracts,
a number of disciplines really struggle with sharing the risk of other
disciplines – but this is not something we can eliminate. Some of the
best firms using IPD now tell me that trust between the disciplines is
essential in IPD and most important in the early stages of a project,
but people do not want to share their contingency until after they
trust each other.”
Beck goes on and adds, “The logical conclusion is to merge disciplines,
or form long-term alliances between a particular team and the
client. IPD may be a strong driver in bringing this unification about.
The cost of investing in acquiring, customizing and developing the
database can’t be justified by a single job, and there is no guarantee
that your firm will work with that architect again, or that this particular
customization and protocol will ever be required in the future.
Standardization of IPD would solve this problem, but that is still
years away. Therefore, the cost has to be amortized over many jobs
to make financial sense. This is where an alliance or merging of the
disciplines makes sense. There is an architecture firm in the Midwest
that has formed a shared subsidiary with a contractor. Both firms
staff it; they pursue one type of work together and are integrated in a
functional way to form this successful subsidiary. Trying to align on
one project and then dispersing is not the answer.”
1. Buckley, Bruce (2009) BIM at Its Best: Contractors Report Big Returns of BIM Investments.
Constructor Magazine.

Section 2: Stakeholder Trends
29
Competition
Firms are seeing prices driven down as competition intensifies.
“There is now big competition for projects and more firms than is
typical pursue every project. In the past we would see 15 firms pursuing
a bridge project in our geographic area; now we see as many as
45 firms competing for the same kinds of projects,” says Ken Wightman.
FMI’s survey respondents agree, with design firm executives
reporting that competition for projects now comes from all quarters,
including firms from other regions, other service sectors and outside
the U.S.
Large firms have been seen competing for small bread-and-butter
projects, in spite of likely having to take a loss. This brings into
greater prominence the need to counter commoditization and find
creative ways to differentiate the firm from competitors, put more energy
than ever into relationships with long-term clients, and look for
problem-solving opportunities that can get a firm in the door earlier
or bring the firm into greater public view in the marketplace.
Several executives reported to FMI that they have seen clients make
choices based on cost alone that could prove to be costly to them
later (i.e., a contract that is too low to complete the necessary work
accurately and safely.) Engineers and architects can continue to battle
the lure of the too-low fee by maintaining close contact with clients
and constantly educating them about what is necessary and realistic
for a project to be designed and constructed effectively and safely.
not identified firms walking away, primarily due to the ongoing need
for new commissions.
Finding and Retaining Staff
As the recession eases, the recruiters have seen their moment arrive
and are actively courting the top talent at design firms; firm leaders
are equally determined to hold onto them. Some acknowledge that
their leadership and staff development efforts have lagged due to the
recession and are anxious to get these back on track.
Firms tell us that staffing remains a tremendous challenge at this
time. Most firms cut back to their essential staff during the depths of
the recession, but now face difficulty finding highly qualified talent
for projects as they become available. With the irregular start/stop/
start again pattern many projects are going through, firms are also
reluctant to hold staff on standby, waiting for project funding that
may not come through.
Recruiters are pursuing senior executives and those with specialized
training in BIM, energy-efficient design and similar technologies.
One COO reported to FMI that even though he is only five years
from retirement, he is called repeatedly by recruiters. Another firm is
frustrated in attempts to build up an experienced staff in cutting-edge
energy modeling; those they train invariably are hired away by other
firms. Strong staff engagement and retention policies can help firms
hang on to key staff.
Some firms are turning down long-term projects at reduced fees, opting
for short projects that will be over quickly, when better-paying
work becomes available. Others are giving long-term clients discounts
now with the caveat that this is not business as usual; but all
are concerned that as prices are driven down, it will be difficult to get
them back to normal again.
A few clients are trying a new way to leverage this heightened competition
for their own benefit by conducting electronic “auctions” between
firms of similar capability on a project shortlist. The shortlisted
firms typically are offered the chance to see how the firms’ fees are
ranked on the shortlist. Then they are asked to “bid” against each
other online by revising their offers, for the opportunity to move up
in the rankings. Some of these are held live, like an eBay® auction,
so that firms can see in real time how the rankings change. Will this
become a trend, and will bidding of architecture and engineering fees
become a predominant process in the nonresidential marketplace,
or is it just a few clients taking advantage of a difficult market? The
direction of this trend will have a lot to do with the willingness of
architects and engineers to participate in this process; so far, we have

30
The 2012 U.S. Markets Construction Overview
Bringing the brightest young people into the design and construction
industry is an additional challenge. One executive expressed the fear
that once again, the most talented young professionals are leaving
engineering and architecture, never to return – there may be people
available, but they are not necessarily the top talent that firms need
now. The number of annual graduates in engineering and architecture
who do not actually enter the professions is believed to be high.
The National Society of Professional Engineers (NSPE) says that “only
about 20% of those who graduate with a B.S. in engineering in the
U.S. go on to become licensed professional engineers.”
Corresponding data for architecture graduates is not available. Architect
Matthew Arnold, author of an independent study on architectural
licensure, believes the number is approximately 30%.
Beyond simply meeting staffing needs today, there is a large challenge
to our industry to understand why the greater number of graduating
engineers and architects are choosing other careers, and how to
bring the best and brightest minds of future generations into these
professions.
Technology Driving Change
Firms are under pressure to keep up with technology and are caught
between clients and software companies. Clients, dazzled by what
software developers show them, are driving firms to use technologies
that do not always do what is advertised – but at no extra cost. One
survey participant told FMI, “The software and tech folks are pushing
for things that don’t exist yet, leading clients to have high expectations
that they can get from us a higher level of technology than actually
exists yet. We are caught in the middle.”
Many firms are seeking to fill positions now to prepare for expected
future needs in BIM, energy modeling and similar areas, but find that
few people are fully conversant, and those they train are poached by
others. There is also a need to look beyond this year’s trends and the
next software update to identify and prepare for possible long-term
impacts of technology on the entire industry.
A CEO in our survey said, “We are trying to enhance what we think
about technology; we would like to jump over some increments and
get to what is coming two to three years from now. It is a little risky
to do this, but we are early adopters and want to take a broad-based
approach. In BIM and information management, we are improving to
some degree. We are looking for new ways to support project information,
new technologies that also help us across the firm for marketing
efforts and so forth. You can go online and customize your
Nike shoes, so what if I could go online and get a custom brochure,
on demand, for a client in Beijing – on his iPad? We suspect that in
one year, the iPad will be a game changer – wait a year or two and
see what happens.”
Peter Beck sees not only the immediate benefits technology is offering,
but also possibly a future resolution to the shortage of people
entering the A/E/C industry. “Technology is definitely driving change
and also contributing to commoditization among the sub-disciplines
across architecture, engineering and construction. We are also seeing
benefits. We are able to do estimating faster and with fewer people,
and I expect to see the same happen in design. The hours in production
phase will go down, while the time in design development will
go up to ensure the necessary level of detail is there. This will help
us solve many problems before we get to the field, which will help
keep costs down. On a recent $200 million project, we estimate that
we found 4,200 coordination issues before we got to the field that we
would not have previously identified in advance. This translates to
a smoother job and fewer field engineers needed. Over time, as we
all are accustomed to working with these tools, it could result in less
contingency held by subconsultants. Fewer man-hours will be required
over time, so unless there is a massive increase in the demand
for square footage, ultimately – just like banking, insurance, music,
publishing and others – we could end up needing fewer people in
the industry.”
FMI will follow this trend closely, to see how technology affects future
staffing needs as it becomes more deeply embedded in the work of
architects, engineers and constructors.
Industry Consolidation /
Mergers & Acquisitions
The perception among design firm leaders is that M&A activity is
way up. Firms with M&A as a strategy are generally happy with the
results and are using it to expand into new markets and bring strong
talent on board. One survey respondent said, “We would like to
double today’s business and become bigger, more diverse and more
geographically spread out. Right now we are predominantly looking
for complementary services to those we offer already, firms that have
value on their client list, talent and the prospect for a good financial
return. We have had a good track record of turning firms around that
had potential but were having difficulty managing their firm.”
Terry Neimeyer shares another perspective: “The M&A market has
changed from an aggressive market with high earnings multiples to a
defensive market with lower multiples and firm owners looking for a
way to cash in on their capitalization before it declines any further.”
Some firms are seeking strategies that will position them to avoid

Section 2: Stakeholder Trends
31
becoming acquisition targets. One commented, “We’re 500 to 600
people right now, and we are pretty sure that is not big enough to
stay in business down the road. We are looking to grow, and organic
growth is only feasible in states where we already have a presence.
So if we are going to expand, M&A is probably going to be the right
vehicle. We want to grow enough that we don’t get gobbled up.”
A few said that the industry could use some consolidation to clear
the playing field of too many firms. One such comment collected
during the FMI survey was, “Personally I think the industry is too
fragmented. The large firms carry the burden for the small firms. The
large firms end up taking on the risk for all the small firms … Consolidation
will turn out to be a net positive for the industry; there are
too many small firms right now.”
The outlook for 2012 on into 2013 appears at this time to be a continuation
of the slow-moving recovery we have experienced during
2011, with some movement forward and some backslides as markets
and economic conditions seek the stability needed to begin an upswing.
General Contractors
By Mike Clancy
As 2011 heads into the history books, many general contractors and
construction managers are looking forward to increased demand and
a return to normalcy. While in some parts of the country, there is
cause for guarded optimism, vertical construction markets nationwide
remain challenged. Those firms that have spent the past few
years improving their business development and estimating have
started to see the fruits of improved capture rates and recovering revenues.
Most firms have made deep and painful changes to their cost
structures in order to rationalize their overheads to the continued
bear market in construction. However, contractors throughout the
industry are being generally conservative, making sure that they remain
flexible to face whatever new challenges the market has yet to
reveal.
Work Acquisition —
The Most Important Strategic Challenge
Louis L. Marines, Hon. AIA, is the founder of the Advanced Management
Institute for Architecture and Engineering, now the A/E Services Division of FMI
Corporation. You can reach Lou via email at lmarines@fminet.com.
Steven J. Isaacs, PE, Assoc. AIA, is a division manager for Architecture and
Engineering Consulting Services at FMI. You can reach Steven at 707.252.2054 or
via email at sisaacs@fminet.com.
Karen L. Newcombe has worked in the A/E/C industry for 25 years and currently
assists on various FMI projects. You can reach Karen at 954.428.5457 or via email
at newk@writebank.com.
Michael Landry is a managing director with FMI Capital Advisors, Inc. You can
reach Michael at 303.398.7288 or via email at mlandry@fminet.com.
Grant Thayer is a consultant with FMI. You can reach Grant at 303.398.7255 or
via email at gthayer@fminet.com.
Hunt Davis is a vice president with FMI Capital Advisors, Inc. You can reach Hunt
at 919.785.9212 or via email at hdavis@fminet.com.
It seems intuitive that work acquisition is a strategic imperative given
the current economic environment. However, many general contractors
and construction managers have failed to develop strategies and
implementation plans that adequately support and clearly demonstrate
the importance of their work acquisition efforts.
According to FMI’s “Survey of Construction Industry Business Development
Practices,” most firms that have changed their business
development approaches have followed the method of increasing the
involvement of firm principals and executives in business development.
This is an important first step to developing a business development
culture. However, a business development culture also requires
operations employees (project managers and superintendents
especially) to develop relationships with key client personnel, and
this is where many firms struggle in implementation. Contractors
often express frustration with the business development aptitudes
of their operations employees, and many have decided that only a
select few have the skills needed to be effective ambassadors for their
companies.
Many of these same firms have failed to invest in their operations
employees, seemingly expecting project managers and superintendents
who have never been asked to act in a selling role before to
develop the needed skills organically. Implementing the correct processes,
providing the proper training and guidance, clearly defining
expected actions and following through with accountability measurements,
the business development effort and the acumen of these key

32
The 2012 U.S. Markets Construction Overview
company ambassadors can be improved, leading to better and more
frequent negotiated opportunities.
For firms operating heavily in the hard-bid arena, the problem is a
failure to bring the same process approach to estimating as is used in
project management. Many firms lack consistency in their estimating
function, with attendant poor results. In order to improve capture
rates, the best organizations are selecting bid opportunities based on
a thorough understanding of their ability to win and execute. These
best-in-class firms are also ensuring that their estimators spend more
time on fewer opportunities, rather than taking a superficial approach
to a wide range of projects. In short, those firms that use a
focused approach in the bid market are achieving dramatic success
compared to their less disciplined peers.
Next-Level Overhead Management
Most contractors have made large and intense cuts in overhead, eliminating
discretionary spending and reducing headcount. Yet these reductions
have proven insufficient in many cases, leading to repeated
cuts as well as the morale and productivity impacts that ensue from
this reactive approach to costs. Again, the best firms are taking a different
approach. Using annual budgeting with quarterly or monthly
updates, these companies are able to forecast personnel needs and
profit shortfalls better. This allows these firms to make smart business
decisions that support their operations while keeping their people
engaged and motivated.
Additionally, many firms have realized that the employees who remain
are the elite – loyal, competent and, in many cases, doing the work of
two or more people. In these firms, rewards and perquisites are starting
to return. Most contractors who suspended 401(k) contributions have
resumed them. Firms are ensuring that their incentive compensation
plans are in place and aligned strategically with company goals. In addition,
training and development budgets gradually are being restored.
These efforts are not entirely altruistic, though; they are a rational response
to concerns about employee engagement and long-term management
succession. Given the demographic challenges of an aging
industry workforce and the relative unattractiveness of construction as
a career (especially with the hit the industry experienced in this recession),
attracting and retaining the very best people will provide a lasting
competitive edge to these firms.
Strategy – Flexibility Equals Strength
Historically, general contractors and construction managers who
conducted strategic planning developed five-year action plans with
clearly defined initiatives. The past few years have demonstrated the
value of flexibility, though. As changes in the industry increase in
both frequency and impact, firms whose strategies allow for quick
identification of trends and predetermined responses have an advantage
over those companies who lack this responsiveness.
Scenario planning has become a vital management skill, as executives
have been forced to analyze possible market changes and develop
quick reaction plans to meet them. Many contractors have focused
on a return to their core – core project types, customers and geographies.
Others have achieved positive results by identifying underserved
markets whose customers require capabilities these firms already
possess.
The attribute all of these successful firms share, though, is an understanding
that just because the strategies employed may change during
the plan period, there is still an inherent value in the exercise of
planning. By reaching down to key midlevel managers in the strategy
development process, these firms are able to tap new ideas while increasing
the engagement of these employees. Some contractors view
strategic planning as an important management succession tool and
use the process to identify the thought leaders who will guide the
organization in the future.

Section 2: Stakeholder Trends
33
Conclusion
Many general contractors and construction managers have focused
on short-term survival concerns for the past couple of years. These
companies are like a man walking while staring at his feet – prone to
stumbling and unable to see the dangers (and opportunities) around
him. As the industry heads into another challenging year, full of uncertainty,
the firms that thrive will be those who raise their eyes periodically
to scope out the path ahead.
Mike Clancy is a senior consultant with FMI Corporation. You can reach Mike at
919.785.9299 or via email at mclancy@fminet.com.
Heavy Civil Construction
By Brian Moore and Wallace Marshall
Do you need another reason to believe this recession is unlike those
we have seen in recent history? It used to be that publicly funded
heavy and highway construction was a good market to be in during
times of recession. It was reasonably “countercyclical” and maintained
decent margins. However, the length and severity of this recession
in private construction markets, coupled with public owners’
lack of capacity for funding have meant more contractors chasing
fewer jobs and resultant lower margins. Although there is significant
need for infrastructure construction and there is almost unanimous
agreement that it is the right thing for our nation, politicians cannot
come to terms with the amount and method of making these investments.
The ongoing resolutions to SAFETEA-LU required because
Congress cannot see eye to eye on how to fund the program is indicative
of a systemic stalemate. The one positive note to all of the
political discussion is that we continue to build a significant amount
of pent-up demand, meaning there will always be an infrastructure
construction market with lots of needs.
In addition, other changes have made it difficult for heavy-highway
and civil contractors to see their way out of these difficult times.
Some of the most important market shifts that are occurring include:
• Competitors rushing to the market over the last few years
• Changes in the stability of funding sources and the methods of
procurement
• New means of differentiation
These shifts separate the sophisticated (and sometime more profitable)
contractor from those stuck in the past.
As funding dries up, state DOTs and other owners tend to focus resources
on large, high-impact projects. For contractors, this means
fewer opportunities and it tends to attract competitors from outside
the market. When there are new (i.e., inexperienced) competitors, it
is more likely that some will fail to understand local business conditions
that can affect construction costs (labor capabilities/availability,
materials issues, regulatory environment, subcontractor quality/
stability). This can lead to significant amounts of money “left on the
table” at bid time. However, in many cases, these contractors have
indeed figured out a way to procure and produce work at a lower cost
and, in fact, are earning a profit in your backyard. Many complain
that their competitors are “taking work below our cost.” However,
those companies continue to exist.
Competition for run-of-the-mill projects is continuing to intensify,
even though the rush of contractors that migrated from private construction
markets has mostly subsided. Fewer dollars in this market
have driven down margins with many companies experiencing losses
for the first time in a generation. To keep a core group of resources intact,
some companies are employing a strategy of pursuing the large,
anchor projects at minimal margin to keep the organization busy.
This strategy has been difficult for small- to mid-sized contractors to
sustain as the down-market threat from large contractors and international
competitors has intensified.
Joint venturing is continuing to be more common because it is a better
mechanism to allocate project risk: It allows contractors to expand
their estimating capacity and have another set of eyes on the project.
To react to threats from larger, better-capitalized competitors, joint
ventures allow contractors to pursue larger and potentially less competitive
projects by gaining access to someone else’s balance sheet.
Project delivery is evolving. Owners are trying new methods like
CM/GC, qualifications-based procurement and public private partnerships
(P3s). As public owners deal with budget cutbacks and an
aging workforce, they continue to lose key engineering and project
management staff. Fewer resources (human and financial) and public
pressure to procure work more efficiently are leading public owners
to consider methods other than design-bid-build. This trend is likely
to continue for the near future as public revenue streams continue to
be weak, with little public support to raise taxes or user fees.
Technology has evolved to the point where it affects the bottom line.
GPS, lasers and WiFi allow information to flow more quickly to and
from the field and allow distributed management and control. Business
information systems make it possible for managers to have instant
access to data and information and allow them to make decisions
quickly.

34
The 2012 U.S. Markets Construction Overview
Almost all companies say that safety is a priority. However, if you
really look at how they operate, it is apparent that it is more talk
than reality. Today, more and more companies are realizing that they
must BE safe in order to qualify for the chance to compete for some
work. Safety is beginning to be recognized more often as a potential
differentiator by companies that before now had only a superficial
interest in it.
Companies seeking guidance on where the market will take them
often come to a couple of conclusions. In the near term, it looks like it
is going to be a difficult market in which to compete and be successful.
However, the long term still looks bright for the market. There
will always be a need for civil infrastructure to support our population
growth, and this means there will always be civil and highway
construction. Our nation recognizes the need and must develop the
will to invest in order to see growth in this market again. In addition,
the changes outlined above add a new level of excitement and opportunity.
As technology and market dynamics bring about change,
some will find a way to capitalize. The key is to be one that makes the
most from change, not one that complains about it and watches the
market pass you by.
Brian Moore is a principal at FMI. You can reach Brian at 919.785.9269 or via
email at bmoore@fminet.com.
Wallace Marshall is a consultant at FMI. You can reach Wallace at 919.785.9279
or via email at wmarshall@fminet.com.
Trade Contractors
By Scott Kimpland and Randy Stutzman
Trade contractors experienced many difficult challenges in 2011.
Most saw fewer work opportunities, changes in the buying practices
of their customers, major cuts in staffing and costs, and declining
backlogs. Looking ahead, 2012 will continue to be a challenging year
for most of these firms. While we may see a few more work opportunities,
the market is not going to return to best of times that many
firms experienced between 2005 and 2008. It will continue to be
tough sledding in a market characterized by the following:
• Challenges with financing and funding for both public and private
projects.
• Limited construction demand in many sectors.
• Hypercompetitive and emotional pricing practices.
• Continued difficulty finding and attracting superstar talent in
spite of high unemployment and lower volumes.
To prepare adequately for these changing times and what many refer
to as the “new normal,” the most successful trade contractors will
be the ones that realize they must make serious changes to the way
they manage and run their businesses. If you currently cannot point
to several specific initiatives that you are working on to address and
meet the demands identified above, you are behind the curve. While
it is easy in times like this to pull in your horns, go into a bunker and
stop spending money, this is a time where change and investment
in change are essential. Nevermore has Jack Welch’s quote, “Change
before you have to,” been so timely and appropriate for our industry.
Several specific trends that FMI is seeing with trade contractors that
should be driving change and action include the following:
• Move to a buyers’ market for construction services where low
price is the priority for the majority of buyers.
• Select serial buyers (mostly health care/hospital groups) using
Integrated Project Delivery (IPD) delivery methods.
• Continued emphasis on prefabrication and modularization.
• Many aging owners are facing ownership transfer and management
succession dilemmas.
It Is More About Price and Less About
Relationships … But Relationships Still
Count
Owners and purchasers of trade contractor services realize that the
market is now in their favor, and more buying decisions are based
on price. For contractors that historically relied on relationships to
get negotiated or shortlisted opportunities with limited competition,
competing in this new environment will be difficult. At a time when
construction managers’ fees are being sliced to 1% or 2%, you can bet
that subcontractor and supplier margins will be strained as well. Trying
to sell value, quality and workmanship to customers who want
to buy on price will do nothing but create frustration and ultimately
lead to poor results. By choosing to target customers and markets that
clearly want to buy on price, the trade contractor must be committed
to strategies that improve productivity and ultimately allow them
to become lower-cost producers. Attempting to manage and execute
work the same way they did several years ago, in today’s competitive
environment, is a recipe for failure.
Trade contractors that choose to operate on the low-cost provider
end of the market can be successful and profitable, but to do so they
will need to make the necessary changes and investments to become
lower-cost producers. A good example of this is Wal-Mart, a major retailer
that strategically chooses to target a market that buys on price.

Section 2: Stakeholder Trends
35
It is also interesting to note that Wal-Mart is very progressive and innovative,
and invests substantial amounts into various initiatives that
support its mission of, “We save people money so they can live better.”
Being a low-cost producer is not as easy as simply being cheap.
work as a result of their IPD, BIM and/or leading-edge prefabrication
capabilities. While price and economics are still important in these
situations, the competition is limited and typically includes good
firms that also understand how to price their work appropriately.
Although the title of this section may have seemed to minimize the
importance of relationships, the intent was to overemphasize the increased
focus on price in the current economy. Regardless of whether
you compete in a pure hard-bid, price-based market or get a reasonable
share of opportunities with limited competition, construction
is a people business and relationships count. In the hard-bid environment,
you will encounter your share of difficult discussions over
change orders, possible claims or other contentious situations. Your
chances of finding fair, reasonable or win-win solutions are much
higher when these situations involve people with solid relationships.
Whether you operate in the hard-bid, select-bid or purely negotiated
market, lowering your production costs and becoming a lean, mean,
productivity machine will be key. Long gone are the days where the
contractor could use conservative production rates, include budgeted
monies for contingency, add a nice margin and still get the job. In
2012 the winners will be the firms that can find ways to increase
productivity. To achieve these improvements, the most progressive
companies will focus on finding and capturing the potential benefits
from the following strategies, initiatives and delivery methods:
• Integrated Project Delivery Model (IPD)
• Building Information Modeling (BIM)
• Multitrade prefabrication and modularization
• Lean project delivery or management methods
• Strategic initiatives focused on productivity improvement
• Investment in equipment and/or tools that affect productivity
• Formal leadership and management development programs for
field managers
• Technology that directly or indirectly affects labor or equipment
productivity
• Strategic approaches to material purchasing and buying
Even if you are not seeing or hearing much about these things in your
market or from your customers, you would be wise to study, understand
and embrace them and begin thinking about how you might be
able to use them to differentiate your firm from the dozen others that
you bid against every day. In some cases, the benefit might be a direct
cost savings; in others the benefit may be a way to deliver on what
appears to be an impossible schedule (using traditional techniques);
and yet on others, the benefit may be in how you can use it to solve
a unique or challenging customer problem. For example, FMI sees a
number of the industry-leading trade contractors getting profitable
While none of these strategies or tactics are the perfect answer, and
in some cases thrown around simply as marketing buzzwords, there
are contractors that have figured out how to make them true game
changers. These firms will put significant distance between themselves
and the rest of the herd that discounts these ideas and waits for
things to get back to normal.
Progressive Owners Are Driving New
Models and Delivery Methods
On the other end of the spectrum, we will continue to see a very
small but highly successful group of trade contractors that can (or are
perceived to be able to) adapt to changing delivery methods, technologies
and trends that select owners and general contractors are
looking for. Many of these opportunities are in the health care/hospital
sector where the projects are large, schedules are tight, and risks
are high. In this environment, established contracting and delivery
methods have failed, and these owners see opportunities to eliminate
many of the traditional problems by using untraditional approaches
and delivery methods.
These progressive owners understand that not all trade contractors
are created equal, and some can bring creative, innovative and unique
solutions to the table if engaged and involved early in the design and
construction process. This is the underlying driver behind the IPD
model. It focuses on early selection of a collaborative project team,
including the general contractor, designers and key trade contractors.
In the purest form of IPD, this team is aligned around a common set
of project goals and, in some cases, includes contractual commitments
that reinforce this alignment and define success. The objective
is to have all stakeholders share in the success or failure of the project.
When the project goals are achieved, the various team members share
in the success. When the project goals are not achieved, the various
team members share in the risks. There are numerous examples of
highly successful projects that have used this approach and probably
a fair number where it has been less than successful. To be most successful
heavily depends on an active owner that can be involved in
expediting day-to-day project decisions, competent and trustworthy
stakeholders, common values regarding teamwork and collaboration,
and often a willingness of the stakeholders to step outside the comfort
zone of a traditional relationship or contract.

36
The 2012 U.S. Markets Construction Overview
These same owners are also realizing that traditional construction
means, methods and delivery models create problems that add cost
and do not optimize construction schedules. As a result, they are
pushing the lean philosophy, utilizing tools like BIM and supporting
multitrade prefabrication that allows significant portions of a project
to be manufactured off-site in a controlled environment. While most
of these ideas and practices have been around for several years, the
better owners, CMs, GCs and trade contractors are finally beginning
to get past the learning curve and realize significant improvements in
the following areas:
• Schedule reduction and earlier revenue generation by
building owners
•Productivity
improvements
•Reduced rework
• Fewer field conflicts and crisis coordination in the work area
• More collaboration and less conflict between project stakeholders
Trade contractors that choose to operate in this environment must
be very progressive in their business development efforts, as securing
this type of work will require a deep understanding of marketing,
strong presentation skills and the ability to create professional presentations
that clearly differentiate unique capabilities. In most cases,
the owners on this end of the spectrum will be serial buyers who continually
buy construction services and see the value that a progressive
trade contractor can bring to the construction process. Trying to operate
in this market and the pure, competitive-bid market at the same
time will be next to impossible, and many midsized trade contractors
that have played both sides of the fence when demand was high will
be forced to move to one end or the other.
The Evolution From Stick Building to
Prefabrication, Manufacturing and
Modularization
Historically, most buildings were stick-built, where each piece of construction
material was delivered, handled (multiple times) and ultimately
installed one piece at a time on-site. Almost a decade ago, progressive
mechanical contractors began to realize that prefabricating
certain mechanical elements in a shop setting could bring many advantages,
including improved productivity, better safety and schedule
benefits. More recently, many electrical contractors and some framing/drywall
contractors have taken advantage of similar advantages
from prefabrication and building in a controlled environment. In late
2010 and 2011, we began to see a number of innovative examples of
multitrade prefabrication, where the mechanical, electrical and framing
trades teamed up and manufactured building elements in a fabrication
facility located in close proximity to the project. Many of these
examples involved prefabricated headwalls in hospital settings where
mechanical, electrical and framing scope converge.
Other examples involving fabricated bathroom pods for hospitals
or college dorms are also gaining popularity. A great example is the
Miami Valley Hospital project where the Skanska Construction and
the key subs’ success story went viral. Not only is much of this fabrication
work being done in temporary facilities at or near the job
site, but we also are beginning to see manufacturing companies that
build complete bathroom pods in a factory, shrink-wrap and ship
them to the construction site. Once on-site, the pods are lifted into
place; a few quick and simple electrical, piping and HVAC connections
are made; and the shrink-wrap is removed. Installed is a fully
operational bathroom with a key in the door, flooring, wall covering,
granite countertops, a shower curtain and a fresh roll of toilet paper
ready to go!
In Europe and other parts of the world, prefabrication and modularization
construction methods have proven to be very successful. Expect
to see this trend in the U.S. accelerate as owners demand shorter
schedules, labor supply becomes more and more of a challenge, and
traditional construction approaches prove less and less successful in
certain scenarios. The benefits that can be realized from prefabrication
are too significant for this trend to be ignored.

Section 2: Stakeholder Trends
37
It Is Easier to Get Into This Business
Than It Is to Get Out
Over the past several years, there have been a number of unexpected
events in the construction industry. The aging of baby boomers was
not one of those. It has been expected for decades and is now upon
us. Baby boomers (those born between 1946 and 1964) number
about 79 million people. By contrast, the following generation (usually
referred to as Gen X and including those born between 1965 and
1980) numbers only 46 million people. Baby boomers have been
shaping the culture since their arrival, so why should ownership
transitioning be any different? They are currently between 48 and
66 years old, and their retirement is just beginning, but the impact
is already significant. In the next 10 years, the vast majority of senior
management teams will have to be replaced. As one FMI client was
quoted, “It seems like I spent the first half of my life trying to build
the value of the business; now it looks like I might spend the second
half trying to transition out of it.”
Transitioning a successful trade contractor was once rather straightforward.
The goal was to pass the business to the next generation of
family members at as low a value as possible. Since revenues, margins
and net worth were relatively low, this was not a difficult task. In the
past 15 years, this model has changed:
• In the late 1990s, consolidators, utilities and private equity companies
started buying successful trade contractors. Owners who
previously could not spell EBITDA were now arguing add backs
and multiples. In short, they had active third-party buyers with
cash.
• As children had more choices, passing the business to family
members became the exception rather than the rule.
• While the concept of selling to employees is attractive to many
owners, they do want to achieve fair market value for their firms.
Before the downturn, internal transfers were becoming difficult. High
earnings, net worth and owners’ expectations made it almost impossible
to transition ownership to employees in a timely manner. As
revenues, profits and bonding requirements have lessened, employee
buyouts have actually become easier to achieve. Owners have also
been reminded that we are still a cyclical industry. This may be the
only good thing to come out of the downturn.
• Energy and power
•Energy efficiency
• Industrial construction and maintenance
•Infrastructure
• High percentages of recurring revenue
• Other sectors with high barriers of entry
The majority of trade contractors are not salable to a third party and
will ultimately be transitioned to employees in some manner.
One factor has remained constant. The biggest challenge in transitioning
ownership has always been and will always be in the area
of management succession. A long time ago, it was said that if you
have a business that cannot operate without you, you do not have a
business, you have a job. This is still very true. Finding, training and
retaining top senior managers will be the biggest challenge that most
trade contractors will ultimately face.
Conclusion
As mentioned in the introduction of this section, 2012 will most certainly
be a year of challenge and change for trade contractors. At
this point, the market appears to have bottomed out with some evidence
of a slow recovery beginning to happen. The good news is that
construction is still an $800 billion-plus industry in the U.S., and
demand for trade contractors will still be significant. As in any competitive
industry, those that are progressive, willing to change and
capable of adapting will get their share of this work and ultimately
control their own success and destiny.
Scott Kimpland is a director at FMI. You can reach Scott at 813.636.1263 or via
email at skimpland@fminet.com.
Randy Stutzman is a managing director with FMI Capital Advisors, Inc. You can
reach Randy at 813.636.1247 or via email at rstutzman@fminet.com.
Third-party buyers have become much more sophisticated and strategic
in their actions. While there is still a market for good trade contractors,
those in most demand are focused on the following sectors:

38
The 2012 U.S. Markets Construction Overview
Publicly Owned Contractors
By Curt Young
The outlook for many engineering and construction (E&C) firms has
been muddied by the deep malaise affecting the global markets. Most
E&C firms experienced a significant decrease in both volume and
profitability in 2010, reflecting their struggles in working through
a weak backlog. The performance of publicly traded E&C firms has
improved in recent months, however, as many firms have successfully
right-sized their businesses and refocused on areas of strength and
opportunity. In fact, the earnings of nearly 60% of the publicly traded
E&C companies tracked by FMI rose during their last 12-month reporting
periods.
As a whole, these E&C firms, which include architectural and engineering
(A/E) companies, general engineering and contracting
firms, and specialty contractors, experienced median year-over-year
revenue growth of 4.5% and median year-over-year EBITDA (earnings
before interest, taxes, depreciation and amortization) growth of
5.8%. The stock price of the companies comprising these E&C segments
plummeted by 48.7% on the median in 2008. However, since
December 31, 2008 to July 31, 2011, the share prices of these E&C
firms have risen notably and climbing on the median by 22.1%.
Residential homebuilders continue to suffer as high foreclosure rates,
weak economic conditions and tighter underwriting standards have
depressed demand and kept existing housing inventory at relatively
high levels. Despite record-low interest rates, housing starts have remained
at an anemically low, seasonally adjusted rate of 580,000 and
can be expected to remain at a depressed level until inventory works
off and real job growth ensues. For purposes of comparison, the longterm
annualized rate for housing starts exceeded 1,500,000 prior to
the Great Recession. Such depressed conditions have been brutal for
homebuilders. The revenue of the 16 publicly traded homebuilders
tracked by FMI has declined by a compound average annual rate of
25.2% over the past five years (i.e., total drop of more than 75%),
with most firms realizing continued losses over this period. However,
the stock prices of homebuilders bounced off lows reached in late
2008 and have increased more than 45% since – signaling that the
roughest stretch for these stocks may be over. Despite the recent recovery,
homebuilder stocks are still down more than 75% from their
July 2005 peak.
the robust growth rates experienced in the earlier part of the previous
decade. The decline in revenues has adversely affected earnings,
as evidenced by the 14.0% average annual decline in materials producers’
EBITDA over the past three fiscal years. The punishment to
materials producers’ stocks occurred in 2008, however, with prices
falling by more than 40% in that year. Since December 31, 2008,
stock prices, on average, have recovered by approximately 20%.
Economic conditions have also been difficult for building products
firms. During the past five years, more than half of the building products
manufacturers and/or distributors tracked by FMI have experienced
a decline in revenues and/or earnings. Results have improved
for these firms recently as reflected by median year-over-year revenue
and EBITDA growth of 3.9% and 4.6%, respectively. The stock performance
of building products firms also suggests a turn of fortune.
After suffering a median decline of 38.1% in 2008, building product
stocks have rallied by 54.0%, thereby recouping most of their losses.
Public E&C Company Groupings
As indicated on Exhibit 1, next page, the public firms in the E&C
industry are divided into five groups:
1. Architectural, engineering and environmental consulting firms
(A/Es)
2. Construction contractors (contractors)
3. Basic construction-materials suppliers [construction aggregates,
cement, and asphaltic and cement-based concrete] (materials)
4. Residential homebuilders (homebuilders)
5. Building products firms (building products)
For better comparative analysis, the contractor group and the building
products group were divided into subgroups. The contractor
group was divided into engineering and general construction (general
E&C contractors) and specialty contractors (specialty), whereas,
the building products group was divided into building products
manufacturers (manufacturers) and building products distributors
(distributors).
Demand for basic construction materials has contracted in recent
years, reflecting the broad slowdown in the economy. The fiscal year
revenues of the 16 construction materials firms tracked by FMI were
down by 1.7%, on average, representing a significant departure from

Exhibit 1
Publicly Traded Engineering and Construction Companies
Section 2: Stakeholder Trends
39
Architectural, Engineering
and Environmental Firms
AECOM Technology Corporation
The Babcock & Wilcox Company
Ecology & Environment, Inc.
Energy Solutions, Inc.
Fluor Corporation
Foster Wheeler AG
Hill International, Inc.
Jacobs Engineering Group Inc.
KBR, Inc.
Michael Baker Corporation
Tetra Tech Inc.
TRC Companies Inc.
Shaw Group Inc.
Stantec Inc.
URS Corporation
Contractors
General E&C
Aecon Group Inc.
Balfour Beatty plc
Bilfinger Berger SE
Bouygues SA
ENGlobal Corp.
Flint Energy Services Ltd.
Granite Construction Incorporated
Helix Energy Solutions Group, Inc.
Hochtief AG
Kajima Corp.
Lend Lease Group
McDermott International Inc.
Obayashi Corp.
Primoris Services Corporation
Skanska AB
SNC Lavalin Group Inc.
Sterling Construction Co., Inc.
Tutor Perini Corporation
VINCI S.A.
Willbros Group Inc.
Specialty
Black Box Corporation
Chicago Bridge & Iron Company N.V.
Comfort Systems USA Inc.
Dycom Industries Inc.
EMCOR Group Inc.
Global Industries Ltd.
Goldfield Corp.
Great Lakes Dredge & Dock Corporation
Insituform Technologies Inc.
Integrated Electrical Services, Inc.
Layne Christensen Co.
MasTec, Inc.
Matrix Service Co.
North American Energy Partners Inc.
Orion Marine Group, Inc.
Pike Electric Corporation
Quanta Services, Inc.
Schuff International, Inc.
WPCS International Inc.
Homebuilders
Avatar Holdings Inc.
Beazer Homes USA Inc.
Brookfield Residential Properties Inc.
DR Horton Inc.
Hovnanian Enterprises Inc.
KB Home
Lennar Corp.
M/I Homes, Inc.
MDC Holdings Inc.
Meritage Homes Corporation
NVR Inc.
Pulte Group, Inc.
Ryland Group, Inc.
Standard Pacific Corp.
Taylor Wimpey plc
Toll Brothers Inc.
Construction Materials Firm
Ameron International Corporation
CEMEX, S.A.B. de C.V.
Continental Materials Corporation
CRH plc
Eagle Materials Inc.
Heidelberg Cement AG
Holcim Ltd.
Lafarge SA
Martin Marietta Materials Inc.
MDU Resources Group Inc.
Monarch Cement Co.
Texas Industries Inc.
Titan Cement Company S.A.
Trinity Industries Inc.
United States Lime & Minerals, Inc.
Vulcan Materials Company
Building Products Firms
Manufacturers
AAON Inc.
Acuity Brands, Inc.
American Woodmark Corporation
Apogee Enterprises, Inc.
Armstrong World Industries, Inc.
Griffon Corporation
Headwaters Inc.
HNI Corporation
Hubbell Inc.
Ingersoll-Rand Plc
Interface Inc.
James Hardie Industries SE
Lennox International, Inc.
Louisiana-Pacific Corporation
Masco Corporation
Mestek Inc.
Mohawk Industries Inc.
NCI Building Systems Inc.
OMNOVA Solutions Inc.
Owens Corning
PGT, Inc.
Quanex Building Products Corporation
RPM International Inc.
The Sherwin-Williams Co.
Simpson Manufacturing Co., Inc.
Stanley Black & Decker, Inc.
Trex Co. Inc.
Universal Forest Products Inc.
US Home Systems Inc.
USG Corporation
Distributors
Beacon Roofing Supply Inc.
Bluelinx Holdings Inc.
Builders FirstSource, Inc.
Fastenal Co.
Huttig Building Products Inc.
Interline Brands Inc.
Lowe’s Companies Inc.
The Home Depot, Inc.
Watsco Inc.
Wolseley plc
W.W. Grainger, Inc.
General State of the Economy and
Outlook for the Future
Total construction put in place in the U.S. declined for the fourth
consecutive year in 2010, falling from $901 billion to $818 billion
(see Exhibit 2 below). The decline was almost entirely the
result of the contraction in the nonresidential building market. In
2010 nonresidential building construction contracted by more
than $80 billion (18.6%), whereas nonresidential construction
declined by more than $2 billion (1.0%), and construction of
non-building structures (i.e., roads, infrastructure, utilities, etc.)
declined by less than $1 billion (0.3%). FMI is projecting modest
growth in residential and non-building construction in 2011 and
2012. The non-building construction market has been relatively
stable the last couple of years, with annual growth rates ranging
from slightly less than 0% to greater than 3%. The residential market,
on the other hand, has been extremely volatile, experiencing
12% to 19% positive annual growth rates between 2003 and
2005, which drove residential construction up from $451 billion
to $618 billion, and 19% to 30% negative annual growth rates
between 2007 and 2009, which drove residential construction
down from $620 billion to $252 billion.
Exhibit 2
Residential construction is expected to experience a gradual recovery
in the next few years. FMI’s Research Services Group is
projecting residential construction to climb to $445 billion by
2015, which would effectively bring the market back to 2002-
2003 levels. Any recovery will be fragile and will be highly susceptible
to prevailing economic conditions. An aged housing
stock, favorable demographics trends (e.g., immigration, maturation
of Generation Y, downsizing of baby boomers) and greater
affordability should provide a certain level of support to the new
housing market in coming years.

40
The 2012 U.S. Markets Construction Overview
AIA’s Architectural Billings Index, a leading indicator of nonresidential
building construction, has improved significantly since the beginning
of 2009. However, the index, at 46.3 in June 2011 remained below
50.0, signaling continued contraction in the construction markets
(i.e., a score above 50.0 indicates an increase in architectural billings,
whereas a score below 50.0 indicates a decrease). Considering the
index leads construction spending by nine to 12 months, nonresidential
construction activity can be expected to decline until at least
early 2012. The downturn is negatively affecting certain subsectors,
including lodging, manufacturing, office and commercial construction,
to a much greater degree than other subsectors, including health
care and education, which have experienced a much more modest
downturn thus far. Non-building construction, which has been aided
by federal stimulus and an improved economy, is expected to remain
healthy during the next couple of years, with expected growth rates
in 2011 and 2012 of 3% and 5%, respectively.
Construction Industry Stock Performance
The graph below plots the performance of FMI’s five major E&C indices
versus the S&P 500 over the past 10 years.
With the exception of building products firms, publicly traded E&C
firms have experienced a significant amount of variability compared
to the S&P 500 over the past 10 years. Between July 2000 and August
2005, the market capitalization of homebuilders increased by an astounding
700%; however, between September 2005 and November
2008, homebuilders incurred dramatic losses that wiped away most
of the gains amassed earlier in the decade. Since November 2008, the
market capitalization of homebuilders has increased more than 25%.
Engineering and architectural firms’, contractors’, and construction
material firms’ stocks have also experienced a tremendous run-up,
with market capitalizations skyrocketing between 2003 and 2007.
These segments gave up most of their gains in 2008 and have generally
been trending upward since. Despite this volatility, A/E firms and
contractors have significantly outperformed the S&P 500 over the
past 10 years. Between July 2001 and July 2011, $1,000 invested
in the S&P 500 would have grown to $1,067, whereas, that same
$1,000 would have grown to $2,308 if invested in A/E firms and
$1,994 if invested in contractors. As shown, the stock market performance
of residential homebuilders, construction materials firms and
building products firms has been similar to that of the S&P 500 over
the past 10 years.

Section 2: Stakeholder Trends
41
General Valuation Issues
Valuation Multiples
Although privately held companies dominate the E&C industry, an
evaluation of public firms establishes some benchmarks of performance
within the industry for both public and private companies.
Furthermore, the concerns and strategies of public firms usually reflect
general trends in this market. Public E&C company stock pricing
can also provide some guidelines for valuing privately held firms
in the industry.
Architectural, Engineering and
Environmental Consulting Firms
The A/E group experienced respectable year-over-year median
revenue and earnings growth, at 4.6% and 2.5%, respectively.
Firms that experienced year-over-year revenue and earnings
growth include AECOM, Ecology and Environment, EnergySolutions,
Tetra Tech, Stantec and URS. AECOM, a diversified
global engineering firm focused on the transportation, facilities
and environmental markets, exhibited particularly strong performance,
with respective revenue and EBITDA growth rates
of 17.4% and 23.4%. Ecology and Environment, a $150 million
environmental consulting firm headquartered in Lancaster,
N.Y., and Tetra Tech, a $1.6 billion engineering firm headquartered
in Pasadena, Calif., also exhibited strong year-over-year
performance. Fiscal year EBITDA margins ranged from a low
of -1.8% (TRC Companies) to a high of 14.5% (Stantec). The
groups’ median and average fiscal-year EBITDA margins were
respectable at 6.9% and 7.0%. On the median, ROE, often regarded
as the ultimate measure of financial performance, was
rather unimpressive for the group at 11.0%. Of the companies
in the A/E category, Babcock & Wilcox, a clean energy technology
and services firm that spun off from McDermott in 2010,
experienced the highest ROE last year at 36.8%. TRC Companies
had negative net income last year and, consequently, experienced
the lowest ROE in the group.
Median Valuation Multiples
(as of July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
8.1
9.8
1.7
16.1
Median Valuation Multiples
(July 31, 2001 - July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
RANGE
5.0 14.4
5.9 16.8
1.1 3.5
10.8 27.2
MEDIAN
8.8
8.3
1.9
18.5
As shown, the A/E group’s median EV/EBITDA (8.1x), EV/EBIT
(9.8x), price-to-book value (1.7x), and price-to-earnings (16.1)
ratios were near their long-term levels, which suggests that
markets do not foresee a substantial change in the performance
level of these firms in the near future.
Prominent M&A Transactions
KBR, Inc. (NYSE: KBR) acquired Roberts & Schaefer Company
from Elgin National Industries, Inc. for approximately $290
million on December 21, 2010. Roberts & Schaefer Company
engages in the design, construction and commissioning of bulk
handling and transportation facilities for power, minerals and
mining, oil and gas, and industrial processing industries in the
United States and internationally. Founded in 1903, the company
is based in Chicago, Ill.
Tetra Tech Inc. (NasdaqGS: TTEK) acquired BPR Inc. for
$157 million in cash on October 4, 2010. The purchase price
includes cash of $117 million and earnout payments of $40
million upon the achievement of specified financial objectives.
For the last 12 months, BPR reported revenues of $170 million.
BPR Inc. provides engineering consulting and construction
services. Its services include building design, renovation,
cleanrooms, construction management, structural engineering,
illumination, project management, civil, maritime engineering,
and mechanical and electrical engineering. It serves clients
in institutional, manufacturing, pharmaceutical, educational,
chemical, petrochemical, aluminum, mining and governmental
sectors. The company was founded in 1961 and is based in
Quebec City, Canada.

42
The 2012 U.S. Markets Construction Overview
WS Atkins plc (LSE: ATK) entered into a definitive merger
agreement to acquire The PBSJ Corporation for approximately
$280 million in cash on August 1, 2010. The PBSJ Corporation
provides a range of program management, planning, design
and construction management services to various public and
private-sector clients. The company offers its services to state
and local government clients, including various state departments
of transportation, water utilities, local power generators,
wastewater treatment agencies, environmental protection agencies,
schools and colleges, law enforcement agencies, judiciary,
hospitals and other health care providers as well as to a variety
of private-sector clients. The PBSJ Corporation was founded in
1960 and is based in Tampa, Fla.
AECOM Technical Services, Inc., a subsidiary of AECOM
Technology Corporation (NYSE:ACM), acquired Tishman
Construction Corporation for approximately $230 million in
cash and stock on July 14, 2010. Tishman generated revenues
of nearly $1 billion in 2009. Tishman Construction Corporation,
through its subsidiaries, provides pre-construction and
construction services in the United States. Its projects include
arts and culture, building renovations and interiors, commercial,
convention centers, sports and leisure, K-12 and higher
education, gaming, government, health and life sciences, historic
renovations, hospitality, residential, retail and restaurant,
technology and transportation. The company was founded in
1898 and is based in New York, N.Y. FMI’s Investment Banking
Group represented Tishman Construction in the transaction.
Construction Contracting Companies
General E&C Contractors
The midsize general E&C contracting company, as determined
by the median of the 20 firms in that group, had revenues of
approximately $4.8 billion in 2010. Vinci S.A., the Frenchbased
firm, generated the largest volume last year, with total
revenues of $45.8 billion. The vast majority of Vinci’s revenue
is generated in Europe. Tutor Perini was the largest U.S.-based
contractor included in this year’s survey, generating revenues
of $3.2 billion.
On average, general E&C firms’ revenues grew by 12.8% last
year; however, seven out of the 20 members experienced a drop
in revenue. The majority of the firms also achieved increased
EBITDA year over year, with several firms experiencing a large
jump in profitability. Median ROE for the group was 10.1% although
ROE varied substantially among group members. From
an overall financial performance standpoint, SNC Lavalin and
Skanska have fared the best of the general E&C companies over
the past year or so. General E&C stocks were battered in 2008,
and many firms have still not recouped the losses that were sustained.
The stock prices of several firms in the group, including
Aecon, Bouygues, ENGlobal, Helix Energy Solutions, Sterling
Construction, Tutor Perini and Willbros, are still down more
than 40% since year-end 2007.
Valuation Multiples
Median Valuation Multiples
(as of July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
6.6
8.1
1.5
14.2
Median Valuation Multiples
(July 31, 2001 — July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
RANGE
3.7 11.5
5.3 14.8
1.2 3.1
7.9 34.7
MEDIAN
7.3
10.2
1.7
14.9
As shown, the general E&C contractor group’s median EV/
EBITDA (6.6x), EV/EBIT (8.1x), price-to-book value (1.5x),and
price-to-earnings (14.2x) ratios were below their long-term levels,
which suggests that the next couple of years will continue
to be challenging for many of these firms.
Prominent M&A Transactions
Tutor Perini Corporation (NYSE: TPC) acquired Frontier-
Kemper Constructors, Inc. from Deilmann Haniel International
Mining and Tunneling GmbH for approximately $110 million
in cash and debt assumption on June 1, 2011. Frontier-Kemper
Constructors, Inc. is a general contractor that specializes
in heavy civil and mining underground construction. Among
other activities, the company builds tunnels for highways, railroads,
subways and rapid transit systems; and shafts and other
facilities for water supply and wastewater transport. The company
was founded in 1965 and is headquartered in Evansville,
Ind. FMI’s Investment Banking Group represented Frontier-
Kemper in the transaction.
Tutor Perini Corporation (NYSE: TPC) signed a letter of intent
to acquire Lunda Construction Company from a group of investors
for approximately $150 million on May 31, 2011. Lunda
Construction Company operates as a heavy highway construc-

Section 2: Stakeholder Trends
43
tion company. It operates through two divisions, Heavy Highway
Bridge and Industrial. The Heavy Highway Bridge division
is involved in bridge construction, pile driving, railroad bridges
and concrete work. The Industrial division provides structural
steel erection, marine construction, rigging and millwright,
project performance and specialty services. The company was
founded in 1938 and is based in Black River Falls, Wis. FMI’s
Investment Banking Group represented Lunda Construction in
the transaction.
Tutor Perini Corporation (NYSE: TPC) acquired Anderson
Companies, Inc. for $80.8 million in cash from Roy Anderson
III on April 1, 2011. Under the terms of agreement, Tutor Perini
will pay $64.6 million in cash plus $16.2 million based on
Andersons’ operating results for 2011-2013. Anderson Companies,
Inc. provides nonresidential, residential and industrial
building construction services. The company was founded in
1955 and is based in Gulfport, Miss. FMI’s Investment Banking
Group represented Anderson Companies in the transaction.
Aecon Construction Group, Inc. signed a letter of intent to
acquire assets of Cow Harbour Construction Ltd. for CAD 180
million on August 6, 2010. The purchase price consists of a
CAD 10 million deposit and a further CAD 50 million to be
paid at closing. The remainder of the purchase price will be
paid within 90 days of closing by way of a promissory note.
Cow Harbour provides construction services for oil sands clients
in Canada. The company specializes in mining, environmental
reclamation, project management, overburden removal,
civil and road construction, mechanical, and general contracting
services. The company was founded in 1987 and is based
in Fort McMurray, Canada.
Churchill Corp. (TSX: CUQ) entered into an agreement arrangement
to acquire Seacliff Construction Corp. (TSX: SDC)
for approximately CAD 380 million on May 16, 2010. Seacliff
Construction Corp. provides general contracting construction,
electrical contracting, earthmoving and heavy civil construction
services to public and private sectors in western Canada.
The company was founded in 1911 and is headquartered in
Vancouver, Canada.
Specialty Contractors
The revenues of the specialty contractors ranged from roughly
$30 million (Goldfield Corporation) to $3.6 billion (Chicago
Bridge & Iron). The midsized firms’ revenues in this group were
up 7.8% to $883 million. Tighter earnings margins resulted in
a decline in EBITDA (2.5% median decrease) and much lower
ROEs (2.1% median ROE). Chicago Bridge & Iron and MasTec
were two of the group’s best performers, while Integrated Electrical
Services, a firm that declared Chapter 11 bankruptcy in
2006 and has generally been unprofitable over the last several
years, performed poorly in 2010 and early 2011. The market
rewarded Chicago Bridge & Iron and MasTec for their strong
performance, with share price gains of 104.6% and 67.0%, respectively,
since 2009.
Valuation Multiples
Median Valuation Multiples
(as of July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
7.3
9.4
1.2
16.4
Median Valuation Multiples
(July 31, 2001 — July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
RANGE
3.7 13.0
5.5 16.2
1.0 3.1
7.7 30.6
MEDIAN
7.5
11.0
1.5
17.5
As shown, the specialty contractor group’s median EV/EBITDA
(7.3x), EV/EBIT (9.4x), price-to-book value (1.2x) and priceto-earnings
(16.4x) ratios were slightly below their long-term
levels, which suggests that the next couple of years will continue
to be challenging for many of these firms.
Prominent M&A Transactions
Tutor Perini Corporation (NYSE: TPC) acquired GreenStar
Services Corporation from Eos Partners, L.P. and other shareholders
for approximately $250 million in cash and note on
July 1, 2011. The purchase price consists of $100 million in
cash paid at closing, a $74.9 million promissory note issued
at closing, and $33.5 million of holdbacks to secure certain
indemnification obligations plus a structured earnout based on
the achievement of certain profitability targets over the next five
years capped at an aggregate of $40 million. The note is payable
no later than October 31, 2011. GreenStar Services Corporation
reported revenues of $560 million for the period ended
December 31, 2010. GreenStar Services Corporation operates
as a heavy mechanical, plumbing, HVAC, electrical and specialty
general contractor in the United States. GreenStar Services
Corporation was founded in 2008 and is based in New
York, N.Y.

44
The 2012 U.S. Markets Construction Overview
MasTec, Inc. (NYSE: MTZ) acquired the remaining 67% interest
in EC Source Services, LLC for approximately $130 million
on April 29, 2011. As per the terms of the deal, MasTec, Inc.
will issue 5.13 million shares and assume approximately $8.6
million in debt and a five-year contingent earn-out, payable
at MasTec’s election in common stock, cash or a combination
thereof. The dollar amount of the earn-out will be equal to
20% of the excess, if any, of EC Source’s annual EBITDA more
than $15 million. EC Source Services, LLC, together with its
subsidiaries, provides construction and engineering services. It
focuses on financing, engineering, constructing and deploying
overhead and underground extra-high-voltage electrical systems,
substations, switchyards and pipelines in North America.
EC Source Services, LLC was founded in 2006 and is based
in Mesa, Ariz., with additional offices in Houston, Texas, and
Stateline, Nev. as well as an equipment facility in Frannie, Wyo.
Tutor Perini Corporation (NYSE: TPC) acquired Fisk Corporation
for approximately $120 million in cash on January 3,
2011. Under the terms of the transaction, Tutor Perini acquired
100% of Fisk’s capital stock for approximately $105 million in
cash, subject to a post closing net worth adjustment, plus an
earn-out capped at an aggregate of $15 million based on Fisk’s
performance over the next three years. Fisk Electric Company
had revenues of approximately $305 million for the fiscal year
2010. Fisk Corporation provides design, installation and maintenance
services of electrical, structured cabling and building
technologies solutions in the U.S. and the United Kingdom.
The company was founded in 1913 and is headquartered in
Houston, Texas, with regional electrical division and technologies
offices in Carrollton, San Antonio and Austin, Texas; Las
Vegas, Nev.; Metairie, La; Miami, Fla.; New York, N.Y.; and
Tempe, Ariz. FMI’s Investment Banking Group represented
Fisk Electric in the transaction.
Quanta Services, Inc. (NYSE: PWR) signed a definitive agreement
to acquire Valard Construction Ltd. for approximately
$230 million in cash and stock on October 22, 2010. Under the
terms of the transaction, Quanta Services will pay $118.9 million
in cash and an aggregate of approximately 4.5 million of its common
shares. Out of the total cash purchase price, $5 million will
be deposited into escrow. On the date of the acquisition, Quanta
also repaid approximately $12.8 million in Valard debt. Valard
Construction Ltd., a power line contractor, provides construction
and maintenance services in overhead and underground
transmission and distribution systems, substations, fiber optics
and transmission foundations. The company was incorporated
in 1978 and is headquartered in Edmonton, Canada.
Construction Materials Producers
The 16 basic construction materials producers generated median
revenue of approximately $2.0 billion in 2010. Volume
ranged from $114 million for Continental Materials, a manufacturer
and distributor of construction materials as well as
HVAC products, to the $23.2 billion worldwide revenues of
Switzerland-based Holcim, which has significant cement and
aggregates operations in the United States. ROEs remained at
some of their lowest levels in several years (average 2.8%; median
4.7%), as, on average, EBITDA contracted year over year
by 4.0%. ROEs for the construction-materials producers fell
within a range of -8.9% (Texas Industries) to 14.1% (United
States Lime & Minerals).
After shedding nearly 50% of total market capitalization in
2008, construction-materials producers’ stock prices have only
inched up slightly over the last 31 months. On average, share
prices have climbed 18.7% for the group over this period. The
recovery has not been widespread, however, as several firms,
including Martin Marietta (18.3% decline) and Vulcan Materials
(47.2% decline), have continued to lose value. Only United
States Lime & Minerals has made a substantial recovery from
the losses sustained in 2008.
Valuation Multiples
Median Valuation Multiples
(as of July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
7.9
12.7
1.1
16.2
Median Valuation Multiples
(July 31, 2001 — July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
RANGE
5.3 9.4
7.4 14.0
0.9 2.5
7.5 20.6
MEDIAN
7.7
11.7
1.3
15.4
As shown, as a group, the construction material producers’
median EV/EBITDA (7.9x), EV/EBIT (12.7x), and price-toearnings
(16.2x) ratios were slightly above their long-term levels,
which suggests that the worst may be over for this sector.
Many firms in the group are still carrying relatively heavy debt
loads from the intensive acquisition and expansion activity that
occurred earlier in the decade, and, in some cases, are strug-

Section 2: Stakeholder Trends
45
gling to maintain that debt, given significantly reduced cash
flow. Merger and acquisition activity has picked up in this sector
recently, with a number of buyers selectively looking at opportunities.
Prominent M&A Transactions
National Oilwell Varco, Inc. (NYSE: NOV) entered into
an agreement to acquire Ameron International Corporation
(NYSE: AMN) for approximately $770 million in cash on July
1, 2011. Ameron International Corporation, together with its
subsidiaries, manufactures and sells engineered products and
materials for the chemical, industrial, energy, transportation
and infrastructure industries from its plants in North America,
South America, Europe and Asia. It operates in three groups:
Fiberglass-Composite Pipe, Water Transmission and Infrastructure
Products. Ameron International was founded in 1907 and
is headquartered in Pasadena, Calif.
Cementos Argos (BVC: CEMARGOS) agreed to acquire cement
and concrete assets in Southeast United States of Lafarge
S.A. (ENXTPA: LG) for $760 million on May 12, 2011. The
assets had revenue of $240 million in 2010.
CEMEX, S.A.B. de C.V. (NYSE: CX) agreed to acquire the remaining
50.01% interest in Ready Mix USA, LLC from Ready
Mix USA, Inc. for approximately $380 million on October 8,
2010. Closing was to take place in September 2011. Ready
Mix USA, Inc. produces and distributes ready mix concrete in
the Southeastern United States. The company was founded in
1995 and is based in Birmingham, Ala.
John D. Baker II and Edward L. Baker II signed an agreement
to acquire non-core aggregates and concrete block assets of CE-
MEX, S.A.B. de C.V. (NYSE: CX) for $90 million on July 8,
2010. The assets include seven aggregates quarries, three resale
aggregate distribution centers and one concrete block manufacturing
facility in Kentucky.
Residential Homebuilders
The residential homebuilding category in this year’s public company
report includes 16 homebuilders. The midsize firm had
revenues of $1.1 billion, down more than 17% from the prior
year. Volume of the selected builders ranged from $59 million
for Avatar Holdings to $4.1 billion for Taylor Wimpey. Homebuilders
have faced tremendous challenges in recent years and
have struggled to reduce inventory during a period of tight credit,
high foreclosures and a general unraveling of the 2005/2006
speculative bubble. In July 2011 housing starts were up slightly
year over year at a seasonally adjusted rate of 597,000. However,
this level remains near the lowest on record.
The difficult environment has been reflected in the homebuilders’
financials, as revenue and EBITDA have declined dramatically
over the past few years. The average EBITDA margin of
homebuilders dropped from 13.0% in 2006, to 3.7% in 2007,
to -13.1% in 2008, to -6.9% in 2009 and to -0.6% in 2010.
Thus far in 2011, the average EBITDA margin for homebuilders
has remained slightly negative. The steep contraction in margins
has resulted in median and average ROEs dropping from
around 30% in 2005 to extraordinarily negative levels in 2008
(-43.8% to -56.2%). Homebuilders have been able to slow the
bleeding in recent months, with ROEs improving to around
-3%, over their respective last 12-month reporting periods.
Stock prices recovered more than 45% since 2008, but remain
a far cry from their July 2005 peak.
Valuation Multiples
Median Valuation Multiples
(as of July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
NM
NM
1.3
NM
Median Valuation Multiples
(July 31, 2001 — July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
RANGE
NM 10.4
NM 10.8
0.7 2.4
NM 11.0
MEDIAN
6.6
6.9
1.3
8.3
The group’s valuation multiples continue to reside at the low
end of their normal ranges. The median and averages for TEV/
EBITDA, TEV/EBIT and P/E were not calculated since a majority
of the 16 residential homebuilders did not have meaningful
multiples in these categories due to marginal profits or losses.
From a long-term perspective, many industry experts expect
housing demand to be relatively strong over the next decade
due to positive demographic trends and an aging housing
stock. However, it appears that it will be at least another year or
two before the homebuilding sector begins an earnest recovery.

46
The 2012 U.S. Markets Construction Overview
Prominent M&A Transactions
JH Investments Inc., Oaktree Capital Management, L.P. and
TPG Capital agreed to acquire Taylor Woodrow Holdings
(USA), Inc. and Taylor Wimpey Holdings of Canada, Corp.
(North American Business) from Taylor Wimpey plc (LSE:
TW.) for approximately $960 million on March 31, 2011.
Building Products Manufacturers and Distributors
The revenues of the building products firms included in this
year’s report ranged from roughly $160 million (U.S. Home
Systems) to $68 billion (Home Depot). The midsized firms’
revenues in this group were up 4.8% to $1.8 billion. Stronger
earnings margins resulted in increased EBITDA (7.2% median
decrease) and slightly higher ROEs (5.8% median ROE). OM-
NOVA Solutions and Sherwin-Williams were two of the group’s
best performers. Despite more than 30% of the group continuing
to suffer losses at the net income level, the stock prices of
building products firms have come roaring back since 2008.
With only a few exceptions, the stock prices of building products
firms have risen substantially since 2008 (i.e., on the median,
stock prices are up more than 50% since 2008), which
suggests that the market is expecting the gradual turnaround in
the sector to stay the course.
Valuation Multiples
Median Valuation Multiples
(as of July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
9.8
12.5
1.8
18.5
Median Valuation Multiples
(July 31, 2001 — July 31, 2011)
TEV/EBITDA
TEV/EBIT
P/BV
P/E
RANGE
5.4 11.1
7.2 14.6
1.1 3.1
10.0 25.0
MEDIAN
8.7
10.8
2.1
16.9
As shown, as a group, the building products firms’ median EV/
EBITDA (9.8x), EV/EBIT (12.5x) and price-to-earnings (18.5x)
ratios were slightly above their long-term levels, which suggests
that the worst may be over for this sector.
Prominent M&A Transactions
Graco Minnesota Inc. entered into an asset purchase agreement
to buy the operations of the finishing businesses of Illinois
Tool Works Inc. (NYSE: ITW) for $650 million in cash on
April 14, 2011. The finishing business includes leading equipment
technologies and brands, such as Gema powder finishing
equipment, Binks industrial pumping solutions, DeVilbiss auto
refinish guns and accessories, Ransburg electrostatic guns and
accessories, and BGK curing technology. As of 2010, revenues
of finishing business are $305 million. The acquisition will add
about 900 employees.
Hellman & Friedman LLC signed a definitive agreement to
AMH Holdings II, Inc. from Investcorp, Harvest Partners and
others for $1.3 billion of transaction value on September 8,
2010. AMH Holdings II, Inc. through its subsidiary engages in
the manufacture and distribution of exterior residential building
products. The company incorporated in 2004 and is based
in Cuyahoga Falls, Ohio.
Oak Hill Capital and its fund Oak Hill Capital Partners III,
L.P., along with Hillman’s management team, signed a definitive
agreement to acquire the capital stock of Hillman Companies
Inc. from a group of investors, valued at approximately
$820 million on April 21, 2010. The Hillman Companies, Inc.
provides hardware-related products and related merchandising
services to retail markets. The company serves hardware stores,
home centers, mass merchants, pet supply stores and other retail
outlets in the United States, Canada, Mexico, Latin America
and the Caribbean. The company was founded in 1964 and is
headquartered in Cincinnati, Ohio.
Griffon Corporation (NYSE:GFF) entered into a stock purchase
agreement to acquire Ames True Temper Inc. from Castle
Harlan, Inc. and Castle Harlan Partners IV, L.P. in a transaction
valued at approximately $540 million in cash on July 19, 2010.
Ames True Temper, Inc. engages in the manufacture and marketing
of non-powered landscaping products for homeowners
and professionals primarily in the United States, Canada and
Europe. The company sells its products through retail centers
that consist of home centers and mass merchandisers; wholesale
chains, such as hardware stores and garden centers; and
industrial distributors under the Ames, True Temper, Jackson
Professional Tools, UnionTools, Razor-Back Professional Tools,
Garant and Dynamic Design brand names. The company was
founded in 1808 and is based in Camp Hill, Pa.

Section 2: Stakeholder Trends
47
2011 will likely be another difficult year for publicly held companies
participating in the E&C industry. However, this industry has gone
through many cycles in the past, and, with total U.S. construction put
in place still hovering around the $1 trillion mark, engineering and
construction remains one of the largest and most fundamental industries
in our nation’s economy. While a meaningful recovery may not be
right around the corner, we believe the worst is now behind us.
Building Product Manufacturers
By Porter Wiley and John Hughes
The mood with most suppliers of products and equipment going into
the building industry continues to be somber. Our observations last
year almost can be repeated verbatim as we look ahead at the 2012
market:
Curt Young is a vice president with FMI Capital Advisors, Inc. You can reach Curt
at 303.398.7273 or via email at cyoung@fminet.com.
Information and opinions presented in this report were obtained or derived from
sources that FMI believes are reliable. However, FMI makes no representation as
to their accuracy or completeness. Nothing in this report constitutes investment,
legal, accounting or tax advice or a representation that any investment or strategy
is suitable or appropriate for your individual circumstances or otherwise constitutes
a trading recommendation, implied or to be inferred.
Little good news has surfaced in the last 12 months for most
building product manufacturers. The residential building
market has slowly begun to stabilize and the nonresidential
building market continues to decline before it is expected to
stabilize (in 2011). Non-building-infrastructure-related work
offers some solace with modest gains, but this market is not
the target market for most building product suppliers.
For many building product categories, margins continue to
be challenged as manufacturers in a down market are often
forced to compete on price to maintain key customers, despite
long-term relationships in many cases. As we approach
the end of another difficult year for most building product
manufacturers, a return to normality in terms of pricing,
channel support, staff additions and most long-term discretionary
expenditures still appears to be off in the distance.
The only solace to last year’s forecast is that “off in the distance” is
a year closer this time. A quick look at last year’s Overview trends
follows.
Where Are the Bankruptcies?
As we looked at the continuing downward spiral in the building market,
we noted that this precipitous decline did not yield an avalanche
of building supplier bankruptcies as one might expect. The early reaction
to the market challenges and the unrelenting cost cuts prevented
a more noticeable number of failures in the building products
industry. We also expect that another factor was that many familyowned
businesses made the unpleasant choice to deplete personal
net worth to ride out the storm in anticipation of the rebound. Moving
into the new year, defaults in the industry are expected to accelerate
as the long-awaited construction industry return to prosperity
remains long awaited.
Green Drives Innovation
The predicted green growth continued as expected even during the
building downturn as the energy efficiency and sustainability motivators
have driven a greater share for green construction. As the need
for product differentiation also grew, the research and development

48
The 2012 U.S. Markets Construction Overview
efforts continued in the quest to create new products that capitalized
on the green movement. With the industry’s pace of adoption,
it will be years before we see the true results from these innovation
efforts. As we look toward 2012, we see the momentum continuing
for LEED/green/sustainability/energy conservation activities even
with the headwind of reduced government spending and heightened
cost consciousness by virtually all public and private buyers of construction
services.
Consolidation Activity Returns
Consolidation activity returned and brought back both the strategic
buyers and the financial buyers. The emphasis was clearly on building
products firms in the long depressed residential market with buyers
seeking to capitalize on motivated sellers and lower multiple expectations
from the sellers. Recurring revenue operations, firms related to renewables
and others with a green bent were the most sought-after firms
in the market. Moving forward, we expect that the pace of acquisitions
will continue to accelerate, driven by the demographics that provide an
inventory of sellers, cash-heavy financial buyers and strategic buyers
with an interest in diversification and future market positioning.
2012 and Beyond …
Doing More With Less
Moving forward from a market perspective in 2012 continues to be
much more of the same. Suppliers to the residential market will likely
see some modest improvement in terms of new residential building,
but with a different mix of homes requiring a different mix of products.
Remodeling and additions are also expected to see modest gains for
the near future. Barring another financial crisis, nonresidential building
and infrastructure construction will remain flat for the coming year.
With budget deficits at all levels of government, suppliers will see a shift
in the private to public-sector construction ratio, with a corresponding
shift in product selection and usage.
What that means to the typical building product supplier is a continuation
of the stringent cost controls that have enabled them to survive
the crisis of the past few years. Doing more with less has become the
mantra for many industry firms with only a fading memory of the good
old days that were enjoyed for most of 1997 to 2006. Reduced training
budgets, sales force realignments, customer rationalization, limited advertising,
trade show space reductions and other discretionary spending
will continue to be closely monitored for many industry suppliers. In
addition, the hiring that we all so desperately need remains an elusive
goal for most firms. Overall, it is still not much fun on the supply side
of the building business.
Balance Sheet Repair
One consequence of the prolonged construction slump is that company
balance sheets have taken a pounding. Few firms had the foresight or
ability to cut expenses as quickly as the market disappeared. The result
is that many firms incurred operating losses as they struggled to rightsize
their business to current demand.
These losses needed to be financed somehow, and a variety of methods
were used, including tapping existing credit lines, shrinking the balance
sheet to generate cash, and injecting fresh equity, either from existing
owners or outside investors.
Many firms were able to tap existing credit lines to cover their operating
losses. This short-term fix was simple, but carried with it longer-term
problems. Firms found themselves with higher levels of debt and declining
revenues. And as credit agreements came up for renewal in a
post-housing meltdown world, banks did everything they could to limit
their exposure to housing by shrinking credit lines or, where possible,
simply not offering to renew. This process is still working itself out, as
many firms have high levels of debt and banks seek to limit their potential
losses. Contentious relationships between borrowers and lenders are
all too common in the sector.
Shrinking the balance sheet to generate cash is a natural occurrence
as sales shrink. Less working capital – inventory and accounts receivable
– is necessary to support lower sales volumes. The challenge comes
when the cash generated from a shrinking balance sheet is used to finance
losses rather than pay off existing debt. The result for the firm is
relatively unchanged levels of debt with fewer assets and earnings to
support that debt. That is a recipe for trouble.
Fresh equity to shore up a balance sheet is the most stable and enduring
strategy. Some owners had the wherewithal to do so and reinvested in
their company – though in these times that is not an easy decision to
make. Outside equity is also an option, but not without its own challenges.
With earnings down or nonexistent, equity valuations are low.
One would not choose to sell equity cheaply in a historic trough, but for
some there is no other option. Even the biggest firms are not immune.
Witness the announced $864 million investment private equity firm
Onex is making in JELD-WEN, a multibillion-dollar manufacturer of
doors and windows.
Avoiding distress and the bankruptcy court is not the only reason that
firms are looking to improve the health of their balance sheets. Nobody
knows exactly when, but the housing and construction market will return
some day. When it does, capital will be essential to fuel growth.
Just as declining sales can produce cash from shrinking working capital,
growth sucks up cash, as higher levels of inventory and trade credit are
necessary to support greater sales.

Section 2: Stakeholder Trends
49
The challenge many firms will face is how to flex the balance sheet back
up when the market returns. It would be a shame to have survived the
pain of the past few years and not have the capital available to ride the
market back up when it happens.
Though it is difficult to predict what the lending appetite will be for
banks several years into the future, it is almost certain that a senior debt
alone strategy is not likely to be sufficient for many in this situation. Junior
capital of some sort will be necessary – whether subordinated debt,
minority equity or some convertible hybrid security.
The one bit of good news is that junior capital providers like where we
are in the building cycle and are looking for opportunities to invest in
good companies with balance sheet issues. They understand that many
solid, well-managed companies with excellent long-term prospects
were caught up in the tsunami that befell the market.
Private Equity Returns
Private equity has long been active in building products for a variety
of reasons: very large markets, regional and national consolidation opportunities,
leveragable assets, limited offshore threat in many cases and
stable earnings. All these attributes but the last one still hold true. Sometime
within the next few years, earnings should be rising.
Private equity has taken notice, and demand for investments in building
products companies is strong. The challenge is finding company owners
willing to sell their equity in the current environment, unless they
are forced to (see JELD-WEN above). This has led to a supply/demand
imbalance in the building products M&A marketplace, which is driving
prices for the few healthy building products companies that hit the market
higher. This is an interesting situation, as many PE funds still sit on
languishing investments in building products companies they bought
prior to the meltdown.
Buy low, sell high is the oldest and wisest of investment strategies. PE
firms see where we are in the construction cycle and see now as an
opportune time to “buy low.” The challenge is that owners of building
products companies see the same thing and ask, “Is now is the right
time to sell, or should I wait for better times?” In many cases, the response
is to wait, though a variety of factors may lead to a different
answer. Many entrepreneurs have deferred their retirement until they
can get a better price for their company.
We see a number of things occurring in response to this dynamic.
PE firms are extending their traditional mandates to gain exposure to
a market sure to experience solid growth. Minority investments, distressed
investments, convertible sub-debt and investment strategies
other than strict control buyouts are being considered and done. PE
firms are also paying higher prices for healthy companies, which when
viewed on a forward earning basis may be reasonable. On the other side
of the ledger, company owners have come a long way toward moderating
their price expectations. The boom years and prices of 2005-2007
are a receding memory.
When the Market Finally Returns
By late 2012, barring another financial meltdown, we should begin to
see some positive signs and modest growth in both the residential and
nonresidential building markets. With greater revenue through price
increases, increased demand and continued cost control, manufacturers
should be positioned to return to reasonable profitability levels in the
following years, certainly not a return to glory year levels, but considerably
better than the past few years.
It is time to start thinking about balancing the short-term need to be
vigilant with discretionary spending while beginning to make the investments
required to support future growth. Long-overdue capital
expenses and internal infrastructure support system expenses will be
needed by most industry suppliers to be ready for the market upturn.
Not being prepared creates risks that may prove to be costly if you are
unable to respond to customer needs; do not count on your competitors
also being slow to respond.
One specific risk that we previously noted is your customers’ readiness
when the market returns. Your success in the recovery period is directly
dependent on your channel partners’ readiness during this period of
renewed activity. These firms will also need to address issues such as
working capital, cash flow, staff additions, management controls, business
development, training and quality to be in a position to benefit
from the recovery. Your direct and indirect support of your customers
will increase the likelihood of their success and yours. So not only do
you have to be prepared, but also you need to have the whole team
ready. Compared to the challenges of the past several years, this should
be a much more pleasant and fulfilling challenge.
However, deferment cannot go on forever, and the last few years have
been no fun. We are left with an interesting market dynamic in which
buy-side demand is strong from private equity firms as well as wellcapitalized
strategic players, and with strong, pent-up, sell-side demand
from company owners deferring retirement.
Porter Wiley serves as managing director for the Building Products Sector at FMI.
You can reach Porter at 919.785.9210 or via email at pwiley@fminet.com.
John Hughes serves as manager of the Manufacturer/Supplier Market Sector at
FMI. You can reach John at 919.785.9224 or via email at jhughes@fminet.com.

50
The 2012 U.S. Markets Construction Overview
Owners
By Phil Warner
What difference does a year make? Not much for nonresidential construction.
While there were signs of growth at the beginning of 2011,
that optimism once again has been tempered by reality. The FMI
NRCI Index dropped in the third quarter 2011 to 52.4 from 58.7 in
the second quarter. Unemployment for construction workers is down
approximately 29% since its highs in 2006. Government construction
projects are slowing, while private construction projects show
only small signs of picking up. Delays and cancellations are about the
same as they were in 2010, except now they are less often caused by
lack of funding rather than lack of starting or delays in the funding
and approval process. Federal and state budgets are in a constant
state of emergency and uncertainty, and the electioneering is starting
again, so we can be certain the uncertainty will continue. That makes
the markets nervous and prevents investment in new properties.
accounting for price increases, etc. The point is, that is a lot of money
that could be doing something other than being invested in stock
buybacks and long-term, low interest bonds.
The good news of all that cash-on-hand is offset by the bad news that
it is not being spent on development, new capital equipment, acquisitions
or hiring. Why not? Business lacks confidence in the economy.
The consumer is not spending because unemployment is high, and,
like businesses, consumers are trying to repair their personal budgets
after being devastated in the recession. In other words, our country
is deleveraging itself.
Is there any good news? Like everyone, we are looking for it; but it
seems that any good news comes with a footnote. For instance, it
appears to be good news that corporate profits and cash holdings
are at all-time highs. One of the most obvious examples is Apple, the
maker of iPods, iPads and computers, which at the end of June 2011
had amassed approximately $76 billion in cash and other short-term
investments. (Wall Street Journal, July 21, 2011. “For Apple, a $76
Billion Dilemma” by Yukari Iwatani Kane.) The financial press reports
that U.S. companies are currently holding $2 trillion dollars in
cash. [2] That is approximately one-seventh of the U.S. national debt
or, not coincidentally, about one-seventh of U.S. annual GDP. Moreover,
while we are talking in the trillions, $2 trillion dollars is nearly
four years worth of nonresidential construction at current rates, not
2. Bloomberg, “Use It or Lose It’ Should be the Rule on Corporate Cash,” August 24, 2011.
Banks are beginning to open up a bit and make construction loans
again, but with tougher lending criteria. Like housing, commercial
real estate continues to face foreclosures and loans that have been
“amended and extended,” many of which will fail in the next few
years. Trepp, a leading provider of commercial mortgage information,
reported that problem commercial real estate loans caused 13 banks
to fail in July 2011, and another 100 will close by the end of 2011.
CRE loans outstanding are decreasing, but only by 2% since 2010.
According to O’Connell, Bender & Powers (June 30, 2011), nonresidential
loans are slowly coming down but still total $1.07 trillion. For
comparison, that is about 2.5 times the current rate of nonresidential
building construction or one-half of the cash held by U.S. companies.
Things are getting better, but it will take some time to unwind all of
that outstanding debt. Until then, there is a stalemate in the economy,
and those awaiting a return of private capital should not be holding
their breath.

Section 2: Stakeholder Trends
51
Who Will Break the Investment Stalemate?
Fortunately, some businesses are putting their profits to work as we
expect $343 billion in nonresidential building construction in 2011,
down about 34% from highs in 2008, and continued steady improvement
in non-building structures of approximately $222 billion
in 2011. That is not the kind of growth spurt we had hoped for in
2011, so we will kick that projection down the road another year.
Meantime, caution and quality will be the themes for owners investing
in real estate ventures. Only the brave investors and those with
long-range strategic plans and cash reserves will be getting back in
the markets and taking advantage of low prices for value.
For other investors, vacancy rates are still too high at 17.5%, but
these rates may have peaked. Rents are slightly up (0.8% effective
yearly change), but net absorption is just barely keeping up with added
capacity/completions, which are at the lowest point since 1999. [3]
Retail Bellwether
Historically, the housing and retail markets driven by the consumer
would lead us out of the recession. If that is still the case, we will need
to be more patient. Retail sales rose 0.5% in July, but that was mostly
bargain hunting for back-to-school sales. Shopping malls have historically
high vacancy rates, and many are going bankrupt and closing.
However, according to Chain Store Age (June 28, 2011), “BRE
Retail Holdings, an affiliate of Blackstone Real Estate Partners VI L.P.,
announced . . . it has acquired the U.S. assets and platform of Centro
Properties Group and its managed funds for approximately $9 billion,”
which includes “585 community and neighborhood shopping
centers and related retail assets aggregating 92.1 million sq. ft. in 39
states.”
Like Willie Sutton, the famous bank robber who said he robbed
banks “because that’s where the money is,” the trend for retail construction
is going where the money is, which means building or buying
malls in more upscale, urban A and B markets. More urban malls
are including big-box chain stores like Target rather than competing
with them. Big-box stores, such as Wal-Mart Express, Wal-Mart Market
and CityTarget stores, are reducing their footprints and moving
to the city. If the money is in the large cities, we can expect that is
where more people will be as that is where the jobs are, and fewer are
looking to own new homes and becoming renters, which leads to an
expected growth in multifamily housing.
3. Reis data from http://www.worldpropertychannel.com/us-markets/commercial-realestate-1/reis-office-market-report-real-gdp-growth-office-rents-office-space-net-absorptionrates-office-space-for-lease-asking-rents-office-rental-rates-in-different-us-cities-4510.php.
But that is not where all the money is. Online sales are up 15% or
more and competing with traditional storefronts and malls. However,
traditional stores are increasing their online presence and offering
pickup at local locations. A move that may change the advantage
of selling online is a growing number of states seeking to get their
fair share of sales tax from online stores, a move being contested by
Amazon and others.
Data centers for both security and increased computing power and
storage for the increased use of cloud computing have boomed in
recent years. This helps online companies like Amazon and Google
compete in the electronic business world. While this means more
construction in the IT sector in the short term, there will be less need
for individual, especially small, companies to build their own IT centers
when leasing space is more cost-effective. At the same time, the
cost and time to build data centers is going down as equipment suppliers
go modular to decrease costs and the time to get up and running.
That is one more model for the growing use of modular and
prefabricated construction.
Other markets, such as hospitality and office buildings, continue to
wait on the economy to grow and absorb inventory before a new
building boom will occur. The major activity in hotels in 2011 has
been refinancing loans and acquisitions of existing properties. The
sector has dropped almost 55% since its highs in 2008 and is now at
levels not seen since 2004, with about $12.4 billion in construction
expected to be completed in 2011. Office vacancy rates are stabilizing
around 16%, and rents are improving slightly. However, net absorption
is down, and the market will not make a solid turnaround until
the unemployment rate improves.
Utility construction has been one of the brighter spots this year as
new power projects are dominated by wind and solar power, in an effort
to meet President Obama’s call to reduce dependence on offshore
oil. At the same time, the White House is calling for a reduction of
20% in commercial building energy use by 2020.
Water and wastewater projects have grown, as the EPA estimates approximately
7 billion gallons of clean drinking water are lost to leaking
pipes daily. The total estimated cost to replace aged and inefficient
water supply infrastructure over the next 20 years is approximately
$334 billion or close to a billion more than current spending levels
indicate. Annual water supply construction has grown from $8.6 billion
in 2000 to $16 billion in 2010, but that is far short of what is
needed to address the problem. In the short term, the economic recession
has led to flat spending as municipal governments face revenue
shortfalls and tight credit markets. However, by 2015, water supply
construction is anticipated to grow to nearly $20 billion annually.

52
The 2012 U.S. Markets Construction Overview
Owner Needs and Construction Trends
What owners need the most is more certainty that their markets
will grow and less uncertainty in how the taxation and regulation of
their businesses will be affected by the ongoing crisis of confidence
in Washington. In the meantime, there are a few trends that are continuing
for owners:
• Greener and leaner
• Energy efficient buildings
• Collaborative construction methods
• Full-service and turn-key delivery
• Creative use of technology
(BIM, modular construction, materials)
Greener, leaner and more energy-efficient buildings may have suffered
some setbacks as fewer new buildings are built; however, even
for renovation projects, reducing energy use is one of the primary
objectives. According to McGraw-Hill estimates, nonresidential green
construction grew to somewhere between $43 billion and $54 billion.
More owners want LEED-certified buildings, especially apartment
complexes, office buildings, public buildings, schools and hospitals.
The price differential is going down, and the attractiveness to
renters and occupants is going up.
Owners will consistently look to reduce risk and price, and the increasing
use of modular construction and prefabrication will favor
those contractors becoming expert in these building methods. If even
a significant fraction of the $2 trillion in the coffers of U.S. businesses
starts to flow into the economy again, it could mean more jobs and
construction just around the corner – with money that will help find
innovative and solid investments that prove better and more comfortable
than sitting on a pile of cash.
Phil Warner is a research consultant with FMI. Phil can be reached at
919.785.9357 or via email at pwarner@fminet.com.
The main theme is what owners have always wanted – cheaper, better,
faster – but the “faster” factor is not the highest priority at the moment.
Cheaper does not always mean best value, either, as we learned
in a recent survey of contractors. Owners realize this too, but low-bid
delivery methods prevail in the current market:
Everyone is doing more with less – less human
resources as well as lower profit margins. The
economy has produced a great bidding environment
for owners relative to pricing; however, it does
not come without risks – mainly quality of work
and subcontractor solvency. A significant value
is placed on contractor prequalification with the
hopes that the subcontractors selected will last
throughout the project. (Owner/Project Manager,
large university system, responding to FMI’s 11th
Annual Survey of Owners.)
It is our contention and expectation that, once the recessionary thinking
abates, owners need to focus more on win-win strategies to work
with the best contractors and build the most successful projects. On
large, complex projects, that is the case today.

Section 2: Stakeholder Trends
53
Private Equity
By Hunt Davis and Robert Womble
The private equity industry has continued to remain in a wait-andsee
mode while watching for growth indicators in the broader economy.
Private equity investments, exits and fundraisings remained
consistent with post-financial crisis levels for the first half of 2011.
To date, there have been 811 U.S. private equity deals, representing
$60 billion of investment. Private equity interest in the engineering
and construction industry has remained selective with questions regarding
current economic risks and uncertainties. Sectors that have
attracted private equity interest include construction materials, engineering
and environmental services, and building products.
Following the depths of the financial crisis and economic recession,
private equity activity began to pick back up in the second half of
2009. However, activity has been stagnating at that same level for the
past eight quarters. Lower-middle-market and middle-market companies
continue to account for the vast majority of activity, as 40% of
deals are less than $50 million, and 87% of deals are less than $500
million. Returns on private equity investment are beginning to improve
with one-year internal rates of return (IRRs) of approximately
19.2% and quarter-over-quarter IRRs of approximately 7.6% (as of
12/31/10). Certain bright spots exist within the industry, including
robust exit activity, with the majority of exits occurring in the form of
a sale to a strategic buyer. The outlook for exits over the next two to
four quarters is promising, given a record-large company inventory
(6,000+ companies) in private equity portfolios and the large cash
deposits both strategic and private equity firms are carrying.
During the worst days of the downturn, private equity was unable
to deploy new capital due to rapidly deteriorating target companies,
bid-ask spreads with sellers, economic uncertainty and trouble at
home with its own portfolio companies. Out of this trend was born
a re-emergence of operational partners at firms and operationally focused
funds, if only in marketing. This caused the private equity industry
to stockpile record levels of dry powder or capital committed
to funds that have not been spent. Currently, private equity investors
have accumulated a significant overhang of capital that is burning
a hole in the pockets of private equity funds. This money must be
invested or returned to investors.
While there has been a mix of positive and negative economic signs
through the capital markets and leading economic indicators, the industry
remains stuck in a holding pattern at the time of this writing.
Extreme volatility in the stock market, the U.S. debt/deficit crisis, the
solvency of the Eurozone and fears of further global economic weakness
have prompted institutional equity capital to be quite viscous
for now. While corporate earnings are looking up, it appears we are
going nowhere fast.
As previously mentioned, private equity has been hesitant to enter
the engineering and construction industry with the exception of
construction materials, engineering and environmental services, and
building products. However, there has been some activity of note.
Summit Materials, backed by a $780 million investment from The
Blackstone Group, has been aggressive in pursuing acquisitions in
the construction materials sector. At the time of this writing, Summit
Materials has made four acquisitions in the first half of 2011 and 12
since the beginning of 2010. Summit has been targeting aggregate
and concrete operations in the Midwestern United States. Canadian
private equity firm Onex Corporation has announced an $864
million control investment into JELD-WEN, one of the largest window
and door manufacturers. Alcoa Inc.’s $10 million acquisition
of Electronic Recyclers International, Inc. is representative of one of
the many small- and middle-market engineering and environmental
deals that are getting done. Engineering and environmental services
firms are in a fragmented but consolidating industry, provide a high
value-add to their clients, and are difficult to commoditize.
Bonding is the primary difficulty facing private equity firms investing
in construction industry firms, particularly contractors. Bonding prevents
most firms from taking on high levels of debt, which depresses
the amount private equity firms can pay as buyers. Strategic firms
with excess bonding capacity have a distinct advantage over private
equity funds because they can allow a seller to retain excess capital
that is used for bonding purposes, whereas a private equity fund may
need that cash to support the bonding requirements going forward.
However, there have been great acquisitions by private equity buyers
of bonded contractors when a strong commitment is made to learn

54
The 2012 U.S. Markets Construction Overview
about the bonding dynamics, develop appropriate stakeholder relationships
and capitalize the firm appropriately.
Overall, the engineering and construction industry is an underserved
sector by private equity funds. There have been some big wins and
some big losses, but there are numerous examples of solid successes
in private equity buyouts and investments in our space. They are
an appropriate buyer in certain cases, but the challenge is to weed
through the thousands of undifferentiated private equity firms to find
the ones that are solid candidates and partners. The challenge for
private equity firms looking to invest in this space is to learn the
language of the industry, from bonding to percent-complete accounting
to project-based revenues. When successful, the returns in our
industry can be significantly rewarding.
Hunt Davis is a vice president with FMI Capital Advisors, Inc. You can reach Hunt
at 919.785.9212 or via email at hdavis@fminet.com.
Robert Womble is an analyst with FMI Capital Advisors, Inc. You can reach Robert
at 919.785.9359 or via email Robert at rwomble@fminet.com.
Surety
By Tim Sznewajs
Entering 2012, trends in the surety market continue to resemble the
proverbial duck gliding upon the water – serenely peaceful on the
surface, but churning like mad underneath. Why do we say this?
Despite the challenging fundamentals continuing to face the overall
construction industry, the surety market results demonstrate a sector
relatively unscathed to date. The chart below provides the summary
of the industry’s direct loss ratio :
Period
1st Half 2011
2010
2009
2008
Last 5 Years (2006-2010)
Last 10 Years (2001-2010)
Last 48 Years (1962-2010)
Average Direct
Loss Ratio
11.8%
13.2%
19.6%
13.3%
16.4%
36.8%
35.7%
Data taken from the Surety and Fidelity Association of America
As the data demonstrate, the first half of 2011 and the entirety of
2010’s average direct loss ratio remains exceedingly low by historical
standards; in fact, it is one of the lowest direct loss ratios on record.
While several factors explain this outcome, two of the most obvious

Section 2: Stakeholder Trends
55
explanations include 1) strong surety underwriting discipline in the
marketplace, driven at least in part by the large percentage of the
market controlled by the top 10 underwriters; and 2) the typical 18-
to-24 month lag in claim (and subsequent loss) activity which occurs
from the initial trough in construction markets. In addition, the elongated
decline in backlogs for commercial contractors has provided
enough time to allow for overhead reductions to match decreased
revenue and profitability.
Based on these dynamics, what does 2012 hold for the contractor
community, given the current state of the surety market? FMI believes
that 2012 will be characterized by the following trends in the surety
market:
• Discipline and caution in overall underwriting. Sureties have
worked hard to position their businesses over the past several
years to withstand the downturn in the marketplace. While direct
loss ratios can only increase from their historic lows, the
largest sureties will be vigilant in ensuring the losses to their
portfolios are minimal through rigorous underwriting standards.
• Pushback from onerous contract terms and conditions. While
project owners are anxious to take advantage of the down market
to obtain exceedingly favorable contract conditions, sureties
will continue to provide a firm backstop to zealous owners on
behalf of contractors to ensure the appropriate risk allocation.
• Continued separation of the “haves” and “have nots.” For those
contractors with strong balance sheets and healthy backlogs,
surety credit remains ample. However, for the weaker contractors
struggling in today’s market, surety credit will be difficult
to obtain and may contribute to a further decline in financial
position.
The fundamentals of surety have not changed despite the roiling that
exists in today’s construction environment. For those construction
firms looking to obtain surety credit in a difficult economic environment,
a continued focus on business basics is paramount. These
basics include:
• Manage overhead to be sensible and consistent relative to
realistic revenue projections.
• Employ best-in-class estimating processes to ensure accurate
bids.
• Manage cash conservatively and minimize debt to ensure strong
business liquidity.
• Communicate regularly and openly with providers of credit,
including banks and sureties. A no-surprises strategy will go a
long way towards securing trust and support.
According to Jack Kehl, vice president and Surety Department manager
at Willis of Ohio, Inc., “Sureties will need to roll up their sleeves
and get in deep with their clients if they are going to remain relevant
in the future. The days of sitting back and watching while collecting
bond premiums is coming to an end. A real partnership is needed
moving forward.”
It is a cliché to say that times have changed and business models
must change with them. However, this statement remains true for
both contractors and surety underwriters going forward.
Tim Sznewajs is a managing director with FMI Capital Advisors, Inc. You can
reach Tim at 303.398.7214 or via email at tsznewajs@fminet.com.
Surety underwriters continue to monitor key indicators of the overall
construction economy’s health. Particular attention is being paid to
the subcontractor community and the negative potential it presents
for default or underperformance on jobs. A spike in business failures
in this segment could lead to a rapid tightening of the surety market
for all participants, should it occur. Additionally, it is important to
remember that the surety lines of most insurers represent a relatively
small portion of the overall company. Changes in other parts of the
insurance market, including continued market volatility and low
investment returns, natural disaster and catastrophe losses, mergers
and acquisitions, and other insurance industry fundamentals, have
an impact upon surety market dynamics.

56
The 2012 U.S. Markets Construction Overview
Construction Materials
By George Reddin
For construction materials producers (construction aggregates, cement,
ready-mixed concrete and hot-mix asphalt), 2011 is déjà vu
all over again, with more of the same expected for 2012. There is
more optimism for 2013-2015 as we expect improvements in the
residential construction sector and more clarity on funding for highway
construction.
After the financial markets collapsed in 2008, residential construction
came to a halt, creating a huge drop in demand for construction
materials. This, together with the inability of the White House and
Congress to reauthorize the federal transportation bill, spelled doom
for the demand of construction materials in most markets across the
United States. Most producers have been expecting a recovery “next
year” since 2009 and are again hoping for a rebound in 2012.
While most in the industry believe that we have seen the bottom, few
are expecting significant improvements in 2012.The consensus is for
more of the same next year, with hope that the country avoids a double-dip
recession. The optimism increases beyond 2012, especially if
we have a new highway bill and improved outlook for job growth.
The construction materials sector is highly dependent on residential
and highway construction. The decline in residential construction
has been well-documented and is easily understood by the overall
population. We anticipate significant year over year growth in this
sector between now and 2015; however, this is starting on a historically
low base and results in spending in 2015 that will remain well
below the spending levels at the peak in 2006.
Funding for highway construction comes primarily from the federal
highway bill and state Departments of Transportation. The status of
the efforts to reauthorize the federal transportation bill and the condition
of the various state Departments of Transportation (DOTs) is
less well-known. Funding for the federal transportation bill expired
in September 2009 and has been operating on short-term extensions
with no great hope of a significant increase in funding. Additionally,
at the state level, the outlook for most state DOTs is dismal, with all
but six of the states showing budget deficits.
At the time of this writing, the House and Senate just passed a new
stopgap measure to extend funding for six months at the 2011 levels,
or about $20.6 billion. Construction officials and state transportation
and airport managers are weary of operating under stopgap authorizations.
The new bill is the eighth highway-transit extension since
September 2009, when the last multiyear authorization for the program
expired. The stopgaps have been necessary because Congress
has been unable to pass new long-term bills. The main hang-up for
surface transportation is a funding shortfall and congressional opposition
to hiking the gas tax.
There is significant concern in the industry because of recent efforts
in the House of Representatives to pass a reauthorization bill. The
House Appropriations Subcommittee on Transportation, Housing
and Urban Development approved legislation on September 8, 2011,
that would decrease federal highway and public transportation guaranteed
funding by 34% from the fiscal year 2011 level of $41.1 billion
to $27 billion in fiscal year 2012. The reduction is in line with
the funding supported by existing Highway Trust Fund revenues
over the next six years. This decreased funding would be devastating
to the industry and America’s transportation infrastructure network.
In addition to challenges at the federal level, most states are facing
substantial budget deficits for the fourth consecutive year. According
to the Center on Budget and Policy Priorities, the budget gaps
total $112 billion for fiscal year 2012, which starts July 1 in most
states, with only six states not projecting a deficit. A survey of 13 state
departments of transportation budgets by the Thompson Research
Group for fiscal 2011-12 showed an average decrease of 1.9% from
2010-11 levels, compared with a 1.0% increase from 2009-10. States
are expected to see a gradual return of state tax collections as the
economy rebounds.

Section 2: Stakeholder Trends
57
On a positive note, in September, President Obama submitted the
American Jobs Act (AJA), which calls for $50 billion for highway,
transit, high-speed rail and aviation projects, of which $27 billion is
for highways. According to the bill, highway funds will be distributed
to states using the same formulas that were used in the American
Recovery and Reinvestment Act (ARRA).
The president also requested $10 billion to create a National Infrastructure
Bank. The National Infrastructure Bank would be modeled
after the one proposed in legislation introduced in March by Sens.
John Kerry (D-Mass.), Kay Bailey Hutchinson, (R-Texas) and Mark
Warner, (D-Va.) Under that proposal, the infrastructure bank would
provide loans and loan guarantees that would be secured by toll revenues,
user fees or other dedicated revenue sources. Eligible projects
would include transportation, water and energy facilities, and would
need to cost at least $100 million, or $25 million in rural areas.
Public-private partnerships (P3s) will become more prevalent as municipal
and state agencies become familiar with this funding mechanism.
Voters have been reticent to hand over ownership of roads and
bridges to private, and especially foreign, entities. Even if they become
more open to this idea, most concessionaires are no longer willing
to assume traffic-volume risk, especially in the wake of failures
like San Diego’s South Bay Expressway, which declared bankruptcy in
2010 after three years of unexpectedly low toll revenues.
Impact on Construction Materials Producers
The construction materials sector has seen a significant drop in volume
since the peak, which is defined as having occurred between
2005 and 2006 (2004 for the hot mix asphalt producers). The declines
from peak to trough during the Great Recession, in units of
cement, aggregates, ready-mixed concrete and hot-mix asphalt, are
the greatest since the Great Depression, far exceeding the declines in
the other recessions in the last 40 years.
prices have increased, resulting in fewer tons of hot-mix asphalt being
produced and sold. The increased emphasis on utilizing recycled
materials has also resulted in a decline in the sale of virgin construction
aggregated.
Margins continue to see pressure due to excess capacity and continued
increases in cost. The number of permitted plants in the sector
has remained the same; however, the volumes have decreased significantly,
leading to the expected supply-demand dynamic result. A
small piece of good news is that the product mix in the construction
aggregates sector has shifted somewhat to higher-priced products as
more thin overlays are performed rather than the construction of new
roads. These projects utilize premium products rather than the high
usage of base-rock materials in new construction. The result is an
appearance of average selling prices remaining stable or even increasing.
Continued increased regulation on the industry has also had a
material impact on costs.
The overall result is lower volumes and lower levels of profitability
with less clarity as to the future of the sector. The stock market recognizes
this dynamic, with investors lowering their price expectations
for the publicly traded companies in the sector. Many of the construction
materials stocks are down 30% or more from their 52-week
highs at the time of this writing.
Merger and Acquisition Activity
Merger and acquisition activity has centered around bolt-on, strategic
deals in the aggregates, and asphalt paving parts of the construction
materials sector. There has been very little activity among the cement
companies or in the ready-mix concrete space. The demand for acquiring
construction aggregates remains rather steady through the
economic cycle, with demand for asphalt producers exceeding that
of ready-mix concrete producers at times like these due to the impact
of public versus private spending.
Profit margins in the industry have taken a big hit. The industry has
seen significant decreases in volumes, increased costs of operations
and an excess capacity dynamic that has led to pressure on average
selling prices. The result of these factors is reduced profitability in the
sector and increased uncertainty about the near-term outlook.
In most markets, the unit volumes (tons for cement, asphalt and construction
aggregates; cubic yards for ready-mix concrete) are down
as much as 30% to 50% or more. This is primarily a result of reduced
demand due to the lack of spending in the residential and
highway construction markets. Material costs have also increased,
which means the budgetary dollar now supports fewer units. For
example, the cost of liquid asphalt cement has increased as crude oil
The cement industry, which has already been consolidated in the
U.S., only sees transaction activity when the large deals take place,
and the industry has not seen one of these deals since Vulcan acquired
Florida Rock. There have been few transactions in the readymix
concrete sector due to the significant downturn in the residential
homebuilding sector, which left the average ready-mix concrete producer
reporting loses in recent years. The majority of the transactions
have been small and involved companies that were struggling.
This year has seen numerous bolt-on strategic acquisitions with Summit
Materials and Oldcastle once again leading the way. These transactions
are often less than $50 million in enterprise value and are

58
The 2012 U.S. Markets Construction Overview
with targets in existing markets. Most of these transactions center
on aggregates and asphalt and may have ready-mix concrete as well,
although, the ready-mix concrete is usually not the focus of the deal.
The industry continues to focus on balance sheet management with
debt restructuring and capital raising efforts. Many of the major publicly
traded companies continued to pursue divestitures of non-core
assets. An example is Lafarge’s planned sale of its southeastern operations
to Argos Cement for more than $700 million.
Overall, the pace of mergers and acquisitions has been steady over the
last two years and is expected to remain that way as we enter 2012.
Small strategic bolt-on acquisitions, corporate divestitures and small
distress deals should lead the way again. Outside of the U.S., merger
and acquisition activity is very active, especially in emerging markets
that present growth and consolidation opportunities to buyers. The
internal competition for capital within the global construction materials
producers remains fierce, and the opportunities in the emerging
markets are currently presenting superior return opportunities.
There remains a pent-up supply of prospective sellers, and we expect
to see increased activity from the traditional buyers once confidence
of sustainable growth returns. In the meantime, it will continue to be
a challenging environment for mergers and acquisitions.
Near-term Outlook
The near-term outlook for construction materials producers remains
heavily dependent upon the following:
• Avoiding a double-dip recession. Producers have relied heavily
on public spending for the last three years, as the residential
and commercial markets are essentially inactive. One of the
biggest unknowns remains the future for the reauthorization of
the federal highway bill. Many are concerned and doubtful that
there will be a traditional five-year reauthorization of the bill and
expect the industry to continue to live under the uncertainty of
interim funding. This approach to funding is not conducive to
long-range planning and spending.
• State DOT Funding. The recession has brought an increased
focus on fuel efficiency and overall reduction of miles traveled,
which has a significant impact on the fuel tax revenues.
Additionally, many states face overall budget deficit challenges.
• American Jobs Act. At the time of this writing, the President had
introduced his jobs bill, which had $27 billion for highways.
This is good news for construction materials producers;
however, there is concern about whether or not the bill can pass.
One silver lining may be that the House will back off its proposal
for reduced funding in its Federal Highway Bill reauthorization
proposal.
• Global economy. The economy has withstood a number of
recent shocks. Another major shock to the economy and stock
market could set the construction materials producers back
further. Sovereign debt issues will continue to dominate the
headlines well into 2012.
• Absorption of residential inventory. Material producers do not
expect any major gains on the residential front until the existing
inventory of residential housing is absorbed. This dynamic
leaves most producers feeling that it will be 2013 or beyond
before they see any significant gains.
• Industry consolidation. Merger and acquisition activity should
continue at a steady, albeit modest, pace. Deals will continue to
be in the lower-middle market and will be strategic in nature.
More owners, who were holding out for a return to peak level
profitability, will be resigned to the current market as being the
new normal and will move forward with the selling process.
• Regulation. Costs associated with OSHA, MSHA and EPA
regulations will continue to increase, making it more challenging
for the small producers. The larger players will have an
advantage with a larger production base to support the overhead
commitment to regulatory compliance.
• Talent Development. Materials producers will continue to hire
talent available due to layoffs in the industry and rid themselves
of mediocre employees.
Things appear to have stabilized in 2011 for construction materials
producers. More of the same is expected in 2012, with greater optimism
for 2013 and beyond, as the residential markets eventually
rebound and the federal highway bill funding is resolved.
George Reddin is a principal with FMI Capital Advisors, Inc. You can reach
George at 919.398.7254 or via email at greddin@fminet.com.

Construction Outlook SECTION 3

Section 3: Construction Outlook
61
Construction Forecast
By Phil Warner
In a fast-paced, growth-oriented world, it is hard to accept a slowpaced
economy. It just does not suit our multitasked, smart-phonepacking
self-image. In the past decade or more, we literally have been
wired and programmed for growth. It has become typical – and maybe
too facile – to assume 10% growth as part of our business strategies.
However, for some time, that has been a minimum starting point to
attract investors or retain people with raises and promotions. We must
have superlatives! If we cannot have superlative growth on the upside,
then everyone starts to see superlative crashes on the downside.
Our “very, very” inflated language reflects our inflated expectations
of growth. One of the ways to return to more normal language and
growth – a time when one “very” was pretty darn good – is through
deflating our expectations. That is why, after dropping 34% since
2007, a forecast of 2% growth in total construction put in place for
2011 and 6% (!!!!) for 2012 can look very good, even though construction
put in place has grown on average 3% a year since 1997 in
current dollars. However, adjusted for inflation using 2006 constant
dollars, that is a drop of 1% for 2011 and only a 3% increase for 2012
for construction put in place.
We would like to simply plug the losses from the recession into our
computers, recalculate stock prices and move on. That sort of work
can be done in a flash on the super computers traders use in the
stock markets, but it takes much longer to turn around a once trillion-dollar
construction industry. After all, the economy has suffered
multiple wounds from its severe crash; it still needs more life support
before it can grow on its own power – that is private investment and
business hiring. However, life support is costly, and many are saying
it is past time to see if the patient can live without it. It is a difficult
decision if the patient is you or your company; but we are using a
metaphor for a whole economy of more than 311 million people
here. How many of them are we willing to take a risk, and, more
importantly, what are the consequences?
When it comes to the economy or the healing of patients, we are impatient.
We want a solution right away. We also want to show our
strength, even when market prices are dropping. That is why the solemn,
downward-facing bear is the symbol of receding markets and not
likely going to be replaced with an invalid patient. We like the statue
of the raging bull on Wall Street, so it is not likely anyone will commission
a statue of a raging inchworm anytime soon. However, that is
what our economy looks like right now – an inchworm.
The inchworm economy is creeping forward despite many obstacles
in its path. Growth struggles under the weight of 9.1% unemployment
and the millions of uncounted unemployed. Yet the consumer
is still displaying enough purchasing power to grow sales 8.2% for
May through July 2011 over 2010 rates. GDP is inching along, too,
with the latest report of just 1.3%, but not a negative number as we
had in 2009. Slow growth is discouraging for the growing number
of Americans falling below the poverty line and many more sliding
in that direction if they cannot find jobs soon. This is not just an
American problem; our concerns for European and Middle-Eastern
troubles are just as great. At the time of this writing, it appears the
question is not, “Will Greece default but when will it default?” What
if it does and “defaults big” as some economists are recommending –
yes, recommending? Then, like our recommended deflation expectations,
we will have a real deflation of currencies as lenders can expect
to get fractions back on their investments.
The well-being of the construction industry is intimately tied to that
of the general economy. Although construction unemployment has
“improved” to 13.5%, unemployment for construction has been running
nearly twice that of the general economy, and it looks like many
unemployed construction workers are leaving the industry altogether.
Growth for construction depends on expected long-term growth
for the economy. Long-term, in that short-lived improvements in retail
spending, for instance, do not justify building more stores. The
bulk of construction is directly tied to population changes and employment.
However, even if there is a growing need for new schools
and infrastructure, there must be revenues designated to pay for the
construction.
Not all of the job loss is due to recession. Some of it, especially in
manufacturing, is lost due to gains in productivity. Just like the demise
of the American family farm, U.S. manufacturing has lost more
than five million jobs, nearly 33%, in the last decade. Not all of that
loss is due to off-shoring; much of it is due to efficiency or changing
products. Blame Microsoft, Intel or Google, which are all growing
companies, but that growth displaces other products. How many
typists or typewriters can you count in your company right now?
Where are the drafters and drawing boards? All the gadgets once on
a desktop are now incorporated into smart phones and laptops. Even
the laptop is in peril of becoming a dinosaur because it is too bulky.
To get out of the recession and on to the next boom, we will need new
jobs, new industries and new ideas.
Where is the next big idea? Some candidates include sustainable
energy, infrastructure and transportation, all areas where old structures
and technologies need updating to bring them into the modern
world and prepare for generations to come. Infrastructure and sustainability
will dominate the new markets, though old markets will
still dominate the construction put in place for some years to come.

62
The 2012 U.S. Markets Construction Overview
The American Jobs Act
Chief among the “known unknowns” is the president’s proposed
American Jobs Act (AJA). Among the ideas proposed in the Act there
is $105 billion in potential investment for construction and construction
jobs. Of that potential spending, $50 billion is for “immediate
investments for highways, transit, rail and aviation, helping to modernize
an infrastructure that now receives a grade of D from the American
Society of Civil Engineers, and putting hundreds of thousands of
construction workers back on the job.” While $50 billion is still a lot
of money, it does not necessarily add up to more than what is already
expected to be spent on transportation infrastructure this year and
next. In fact, it is equivalent to the funding from the last SAFETEA-
LU transportation bill—reauthorized for another six months for the
eighth time since 2009 and at the eleventh-hour, two days before
expiration.
The Republicans have introduced their own plan for transportation
funding that would streamline existing transit bills. The plan is headed
by John L. Mica, chairman of the Transportation and Infrastructure
Committee. It would cut highway funding next year by $14 billion
over current levels. In this case, both the president’s proposal and the
Republican proposals agree on the need to cut red tape. The question
is, How will that be done?
The next largest sum of money proposed is $30 billion for schools
and colleges:
• $25 billion investment in school infrastructure that will modernize
at least 35,000 public schools – investments that will create
jobs, while improving classrooms and upgrading our schools
to meet 21st century needs. This includes a priority for rural
schools and dedicated funding for Bureau of Indian Educationfunded
schools.
• $5 billion investment in modernizing community colleges (including
tribal colleges), bolstering their infrastructure in this
time of need while ensuring their ability to serve future generations
of students and communities.
Considering it will take at least two years to get projects off the ground
and completed, this would represent about 16% of current education
construction spending levels. At the rate states are currently cutting
school budgets, including teacher layoffs, these new funds would
likely amount to somewhat less than expected cuts. What might be
just as important is where the funds go, as rural and poor to middleclass
school districts will suffer the most with budget cuts. If jobs do
not improve, these communities may also suffer the most population
loss from people leaving to find jobs closer to urban areas.
The establishment of a National Infrastructure Bank outlined in
the AJA proposal will invest $10 billion as seed capital for the new
bank, targeting infrastructure. This is not such a new idea as there
have been a number of states with similar infrastructure banks for
some years now. If it does indeed attract private investment or stimulate
P3 projects, it will help fund needed infrastructure across the
country. Potential capital markets, including central banks, pension
funds, financial institutions, sovereign wealth funds and insurance
companies, have a growing interest in infrastructure investment. The
establishment of a U.S. government-operated institution that would
provide this investment opportunity through high-quality bond issues
that would be used to finance qualifying infrastructure projects
would attract needed capital for U.S. infrastructure development.
The needs for infrastructure development in the U.S. identified in
the bill now before Congress (Bill H.R. 402) are staggering. They are
based on the research and opinions of various respected associations
and institutions, most notably the American Society of Civil Engineers
(ASCE). Comparing those numbers with current levels of construction
put in place for the U.S., we get an idea of how much more
construction work will be needed to build infrastructure at the rate
suggested by the several reports. (See Exhibit 1. Note: The comparisons
are approximate only as CPIP categories and identified needs
may differ in project type and reporting.) Consider also that the deficit
may increase if governments cut spending back to maintenance
levels in several of these categories, as has been proposed in recent
budget debates.
Another $15 billion is targeted for a new “Project Rebuild” to put
people back to work “rehabilitating homes, businesses and communities.”
The funds are designed to help boost construction jobs and
revitalize neighborhoods blighted by foreclosures and loss of jobs
and rising crime. At this point, it is not clear how these funds will
be targeted, but it is an important problem that needs addressing.
Detractors will say, “Let the markets work.” The vacant buildings will
be purchased when the market is ready and either torn down for new
construction or otherwise rehabilitated at owner expense. The question
is, How long will natural market forces take before that land is
reoccupied and back on the tax rolls?
In the midst of this ongoing climb out of the deepest recession we
have ever known, we begin a new election “year.” Most experts on
such matters expect another record-breaker for campaign costs, in
the $5 billion to $6 billion range. The CEO of Starbucks, Howard
Schultz, has recently called for a halt on campaign donations until we
get the current office holders to start working for the American people
and not just special interests and huge campaign donors. At least
it suggests not everyone is scraping the bottom of the barrel for funds.

Section 3: Construction Outlook
63
Exhibit 1
Identified Infrastructure Needs
Organization or
Institution Estimating
Infrastructure Needs
Amount
Time Frame
In Years
Annualized
Estimated Spending
Needs
Est. 2011 Infrastructure
Construction Put in Place
(CPIP)*
Difference Per Year
(Shortfall)
Notes on Needs
American Society of Civil
Engineers (ASCE)
$2,200,000,000,000
5
$440,000,000,000
$261,225,369,080
$178,774,630,970
“To meet adequate conditions.”
National Surface
Transportation Policy and
Revenue Study Commission
$11,250,000,000,000
50
$225,000,000,000
$85,494,464,244
$139,505,535,756
“For the next 50 years to upgrade our
surface transportation system to a
state of good repair and create a more
advanced system.”
Environmental Protection
Agency
$334,000,000,000
20
$16,700,000,000
$15,732,037,728
$967,962,272
“To ensure the providion of safe water.”
Environmental Protection
Agency
$202,500,000,000
20
$10,125,000,000
$26,937,630,720
$(16,812,630,720)
“For publicly owned wastewater-systemrelated
infrastructure needs.”
Edison Electric Institute,
Electric Power Industry
$298,000,000,000
20
$14,900,000,000
$86,417,842,500
$(71,517,842,500)
“For Nation’s transmission system ‘in order
to maintain reliable service.’”
Total
$706,725,000,000
$475,807,344,222
$230,917,655,778
*The construction needs identified and CPIP estimated are not entirely comparable, and CPIP represents both public and private spending.
Reference Source: Congressional Bill H.R. 402, January 24, 2011
There is also approximately $1 trillion to $2 trillion
dollars in corporate coffers from record profits not being
invested in new capital or jobs or even dividends.
When will those funds decide that low or no returns
are better than looking for new ideas and business?
Finally, there is the residential sector. Everyone is waiting
on housing to lead the way out of the recession.
After all, building new housing usually requires new
streets, schools, shopping centers and the entire supporting
infrastructure. Ironically, it was the housing
boom/bust that triggered the recession, and we are
pinning our hopes on it also starting the recovery. Our
research with industry experts and other data tells us
that we can have a recovery without a new boom in
new housing construction. It will be much slower,
however, and driven by infrastructure and gains in
multifamily and improvements in housing. Housing
is at its most affordable levels right now, but potential
buyers and banks are wary of foreclosures, and, like
banks and business, they are trying to rebuild their
savings wiped away in the markets.
Ultimately, we will have recovery when we overcome
the “fear itself” factor and get back to building and rebuilding
our economy and lives. That will be tough to
do as long as fear garners more votes than realism or
optimism, but we are still a tough industry and people,
are we not?

64
The 2012 U.S. Markets Construction Overview
Construction
Forecast
Our construction forecast for the remainder
of 2011 calls for a 2% increase in overall
construction put in place to $834.8 billion
and a 6% rise in CPIP for 2012. Note,
we use “millions of current dollars” for our
forecast numbers unless noted otherwise.
For instance, the CPIP changes considerably
when we recalculate the data into constant
2006 dollars. That shows the effect of
inflation, especially the cost of materials
important to construction. Using constant
2006 dollars, we expect a 1% decrease in
2011 in total CPIP and only a 3% increase
in 2012.

Section 3: Construction Outlook
65
Residential Construction
Our forecast calls for a 12% increase in residential construction for 2012. While that appears to be a strong recovery, consider housing is just
starting to move off the bottom. The total represents stronger multifamily construction and home improvements as well as single-family housing;
however, the total of $303.9 billion is equivalent to 1997 CPIP. In constant 2006 dollars, the gain is more like 9% for 2012.
Housing starts for July 2011 were 604,000 units compared with 550,000 for July 2010. New home sales for July were only 298,000 units. However,
according to the National Association of Realtors, sales of existing homes fell 3.5% in July for an annual rate of 4.67 million, down from 4.84
million in June 2011. NAHB’s vacancy index for multifamily stood at 35.3 in the second quarter of 2011 compared to 41.9 in Q2 2010.
During the 40 years prior to the 2001 recession, housing starts averaged 1.5 million units annually. While this number usually falls during a recession
that was not the case in 2001. In 2001, low mortgage rates, house price appreciation and poor performance of other investment alternatives
combined to shift personal investment toward housing, which maintained the average level of annual starts at 1.6 million, despite the recession.
Households need jobs before consumption can rise, and businesses need households to consume for hiring to make sense. The vicious cycle perpetuates.
Through Fannie Mae, Freddie Mac and the Federal Housing Administration, the government owned 250,000 homes at the end of June
2011, with another 850,000 in some stage of foreclosure.
Trends:
• Total Occupied Units: According to the Bureau of Census, the vacancy rates for homeowner housing
in the second quarter 2011 were 9.2% for rental housing and 2.5% for homeowner housing.
• Homeownership Rate: The homeownership rate of 65.9% was the lowest since the fourth quarter
1998. The homeowner vacancy rate of 2.5% was approximately the same as the second quarter 2010.
• Housing Affordability: The March composite index for housing affordability was 176.9, up nearly 12
points from the previous years, but down from the February 2011 peak of 193.2. The median home
price fell in July to $138,400, but mortgage rates remain historically low. However, the Case-Shiller
Home Price Index increased 3.6% in the second quarter 2011.
• Household Formation: Although population is growing, household formation is not keeping pace to
the tune of two million fewer households than one would expect given population growth.
• Supply of Unsold Homes: According to the National Association of Realtors, “Total housing inventory
at the end of July fell 1.7 percent to 3.65 million existing homes available for sale, which represents a
9.4-month supply at the current sales pace, up from a 9.2-month supply in June.”
Drivers:
— Unemployment Rate
Core CPI
Income
— Mortgage Rate
Home Prices
Housing Starts
Housing Permits

66
The 2012 U.S. Markets Construction Overview
Residential Construction
Nonresidential Buildings
FMI Forecast

Section 3: Construction Outlook
67
Value of Construction
Put in Place Seasonally
Adjusted Annual Rate
(Millions of Dollars)
as of Q1 2010
Total
Construction
Put in Place
(Q1 2010)
% of Total
Construction
Put in Place
(Q1 2010)
Total
Construction
Put in Place
(Q2 2010)
% of Total
Construction
Put in Place
(Q1 2010)
Public Construction
State, Local
and Federal
304,494
272,722
31,776
33%
30%
3%
276,270
246,672
29,598
33%
29%
4%
Private Construction (FMI)
583,712
67%
558,523
67%
Total Construction (FMI)
888,209
100%
834,793
100%
Lodging
Lodging construction will drop 16% to $10 billion and show some signs of growth at 4% for 2012. Occupancy rates have increased slightly to
62.8% and RevPar is up 7.8%, but still not enough to justify new building plans. The focus is on getting finances in order and rejuvenating older
properties.
Trends:
• The major activity in hotels in 2011 has been refinancing loans and acquisitions of existing properties.
The sector has dropped around 55% since its highs in 2008 and is now at levels not seen since 2004,
with about $10.4 billion in construction expected to be completed in 2012.
• In July 2011, occupancy rose 4.5% to 62.8%. Average daily rate increased 3.2%. Revenue per available
room (RevPar) was 7.8% or $62.63. (STR Analytics, 9/2/11)
• Lodging decreased 16% in 2011 and will increase slightly by 4% in 2012.
• International travel is still steady due to weak dollar.
• Occupancy rates are on the rise.
• Green building is commonplace in remodels and retrofits.
• 2009 was the start of a contraction in lodging construction.
Drivers:
Occupancy Rate
RevPar
Average Daily Rate
Room Starts

68
The 2012 U.S. Markets Construction Overview
Office
Office construction is highly dependent on employment. It will take several years until there is enough employment growth to spur new construction.
Office construction will drop another 5% in 2011, compared with a 32% drop in 2010, with some improvement expected in 2012 to get to $45.5
billion.
Trends:
• Vacancy rates were 17.5% in the second quarter 2011, showing some signs of improvement.
Rents were up slightly, but net absorption slowed in the second quarter.
• Tenants will continue to “trade up” in the near term by relocating or upgrading.
• Unemployment is expected to remain around 9% in 2012.
Drivers:
Office vacancy rate improving
— Unemployment rate
Commercial
U.S. retail sales rose 0.5% in August, but that was mostly bargain hunting for back-to-school sales. Shopping malls have historically high vacancy
rates, and many are going bankrupt and closing. However, according to Chain Store Age (June 28, 2011), “BRE Retail Holdings, an affiliate of
Blackstone Real Estate Partners VI L.P. announced . . . it has acquired the U.S. assets and platform of Centro Properties Group and its managed
funds for approximately $9 billion,” which includes “585 community and neighborhood shopping centers and related retail assets aggregating
92.1 million sq. ft. in 39 states.” More urban malls are including big-box chain stores, like Target, rather than competing with them. Big-box stores
like WalMart Express, WalMart Market and CityTarget are reducing their footprints and moving to the city.
Trends:
• Lower fuel prices may help increase consumer spending on other goods if it holds into 2012.
• Residential building activity increases slowly.
• Commercial construction lags residential by 12 to 18 months.
• Open-air centers are replacing traditional, enclosed malls.
• Vacant big-box stores undergo renovations, such as repositioning for health care and educational purposes.
• Discount and food retailers have major expansion plans for price-conscious shoppers.
• Online retail sales are increasing. Sales for non-store retail sales were up 13.3%.
Drivers:
Retail sales
CPI
— Unemployment Rate
— Employment
Income
Housing Starts
Building Permits

Section 3: Construction Outlook
69
Health Care
Health care construction will grow only 2% in 2010 and is forecast to grow just 3% in 2012. This is a drop from the previous forecast. Despite
slower growth, the sector remains at a historically high level. That forecast is further supported by the panelists for FMI’s Nonresidential Construction
Index, as health care construction continues to be one of the strongest components of the overall NRCI index. Nonetheless, the sector is under
the strain of financing concerns and uncertainty as to government policy changes just as most all markets are. Special-care facility construction is
one area that will help drive future growth. Renovation is another area of growth.
According to a survey conducted by Health Facilities Management magazine and the American Society for Healthcare Engineering (ASHE), 73% of
construction is currently for facility renovation and modernization to be greener and more patient friendly and to update IT infrastructure. (Health
Facilities Management, February 2011.) Among the drivers for updating facilities is the need for greater clinical integration, which requires integration
among IT systems and health care providers to deliver efficient patient care.
Factors that may slow or delay growth are uncertainties in the fate of the health care bill and bank financing. Slow economic growth coming out
of the recession and sharp decreases in the nest eggs of retirees and baby boomers nearing retirement age will lead to more frugality in health care
and retirement choices.
Medical office building vacancy rates are expected to decline when the general economy recovers. The increased focus on outpatient care and elective
surgical procedures by those with the means to pay in cash will help drive this market. Health parks with several related physician practices
have become popular and efficient for doctors and patients, but the health care bill may also affect this trend.
Trends:
• Health care construction grew just 2% in 2011 and will gain another 3% in 2012.
• Aging U.S. population, new technologies, increased single-bed-room demand and increased health care consumerism are shaping decisions
about new hospital design and location.
• New building technologies and facility upgrades increase.
• A high percentage of construction is currently for facility renovation and modernization.
• Hospitals face declining revenues due to higher percentage of uninsured and underinsured patients.
• Potential patients forego elective surgery.
• More capital projects will be put on hold due to losses in investment capital.
• Uncertainty over the health care bill’s effect continues to delay expansion decisions.
• Focus will be on affordability as potential for lower reimbursements from government-funded health care programs, while at the same time
many more people will have coverage.
• Among the drivers for updating facilities is the need for greater clinical integration, which requires integration among IT systems and health
care providers to deliver efficient patient care.

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The 2012 U.S. Markets Construction Overview
Educational
Education construction put in place was down 13% in 2010, so a reduction of only 2% for 2011 and a forecast of 4% growth for 2012 is welcome.
Other than 2010, school construction has been holding up well during the recession, but the current cuts in state and federal budgets threaten
another downturn. If the AJA or at least the education part of it passes, there could be $30 billion available for school construction in selected,
needy districts across the country. For 2012 school construction should hit $91.1 billion in CPIP, but it is not certain if or how much the potential
new funds from the AJA would be additive or, in some cases, replace state money for schools already planned.
Trends:
• American Jobs Act—Modernizing schools/vacant property: $25 billion to modernize at
least 35,000 public schools: improving community colleges, $5 billion.
• Funding is increasingly a local responsibility as states cut support, but local government
budgets would need to increase property taxes.
• Greener schools or renovating existing schools for improved energy use will continue to
be a strong trend in education construction.
• Many major universities have announced they will only build LEED-certified facilities.
• Sustainability and “saving the planet” are now part of the curriculum starting in grade
school, so both parents and students will soon expect their schools to be green.
• Increased use of prefabricated/modular school construction. Not to be confused with
the “temporary” classroom units filling playground and parking space in growing
communities, manufactured modular school construction has gained in acceptance for
school systems looking to save time and money and maybe even improve their green
footprint.
• Rise in distance learning or online courses. Online degrees from universities specializing
in distance learning are becoming more accepted, especially in a world where
knowledge workers spend most of their time working in the online world.
Drivers:
Population Change Younger than Age 18
Population Change Ages 18-24
Stock Market
Government Spending
Nonresidential Structure Investment

Section 3: Construction Outlook
71
Religious
Religious construction lost another 4% in 2011 and will continue to be weak in 2012 with $4.25 billion expected in CPIP. During an economic
downturn, religious construction is usually the first segment to produce a decline. We expect religious construction to increase when consumer
spending and the employment situation improve later next year.
Trends:
• Lending environment continues to be a challenge for many congregations.
• Establishing a capital campaign is becoming increasingly common.
• Many churches are seeing tremendous declines in contributions and tithes.
• More parishioners are relying on their houses of worship to provide guidance and assistance, further
stretching thin resources.
• Social mobility and migration have altered the religious landscape of several regions, including New
England and the Southeast.
• New methods for charitable giving, including online giving and donation collections, are empowering
religious organizations.
• Improved space utilization and additions are taking the forefront, as new construction is increasingly not
an option.
• Churches are becoming smarter about attracting parishioners who are drawn in by facilities and the
church building itself.
• Energy efficiency, green sustainability and long-lasting quality are becoming top features many congregations
want in worship houses.
Drivers:
GDP
Population
— Income
Personal Savings Rate

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The 2012 U.S. Markets Construction Overview
Public Safety
After holding up well with projects under way, public safety construction lost 8% in 2010, another 4% in 2011 and will drop 3% again in 2012 to
around $12 billion. According to a report by the Federal Bureau of Prisons, “The system-wide crowding level in BOP facilities is estimated to climb
to 43% above rated capacity by the end of FY 2011.” Overcrowding and updating facilities are the prime drivers for prison construction. Like other
facilities, new and renovated facilities will seek to be not only more secure, but also greener and more facilities are even seeking LEED certification.
More states are looking at privatization of their prisons to save money.
Trends:
• Overcrowding in jails and prisons leads to new and renovated facilities.
• California’s AB 900 authorizes $7.7 billion to fund 53,000 additional state prison and local jail beds.
• The federal prison population grew by 3.4% in 2009.
• Jail population decreased 2.4% in 2010.
• Privately managed secure facilities are increasing.
• Corrections Corporation of America will alter the conditions at nine detention facilities across five states
to make them less prison-like.
• Private corporations now operate 5% of the 5,000 prisons and jails in the U.S. The private prison industry
is growing at a rate of 30% per year.
• The government appointed its first chief greening officer (under GSA) to oversee aggressive pursuit of
sustainable practices in government buildings.
• CM-at-risk or design-build arrangements increase.
• P3s overcome shortfalls in public financing.
• Public safety budgets see deep cuts, mostly reflected in personnel and salary.
Drivers:
Polulations
— Government Spending
Incarceration Rate
Nonresidential Structure
Investment

Section 3: Construction Outlook
73
Amusement and Recreation
Amusement and recreation construction is expected to decline 2% in 2011 but grow 4% in 2012 to reach $17.4 billion. Casino construction has
been hard-hit during the recession with a number of projects canceled, postponed or otherwise in litigation. Most plans call for downsized additions
or updates of existing facilities. Stadium construction has been strong with a number of new stadiums or ballparks opening and several
large projects in the funding and planning stages. Funding will be difficult as projects requiring state and local contributions will need to balance
spending and taxation with the potential for new jobs and attracting the additional revenue from surrounding infrastructure and businesses. Most
construction in this sector calls for multiuse projects or combinations of retail, hotel and housing accommodations along with the sports or gambling
venues.
Trends:
• High unemployment rates, usually a negative for construction in this sector, may be a major justification
to build new projects to attract work and businesses to a community or city.
• States are reluctant to increase taxes for anything.
• Plans for a P3 to build a new football stadium for UNLV could set a precedent for such projects.
• Minnesota Vikings $1.1 billion project is still in planning stages and awaiting venue decisions.
• San Francisco 49ers are looking to build a new stadium, awaiting decisions.
Drivers:
— Income
Personal Savings Rate
— Unemployment Rate
— Employment

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The 2012 U.S. Markets Construction Overview
Transportation
Transportation construction will decline 3% in 2011 to $37.2 billion. ARRA stimulus helped in the last two years, but with funding winding down
and state budgets being cut, transportation has had a tough time getting back off the ground. The last-minute reauthorization of the transportation
bill until March 2012 will help, but the nearly two month hiatus in funding for the FAA transportation bill delayed construction projects underway
and resulted in lost tax revenues from airports. High-speed rail is being funded, but political differences are slowing any progress. As we climb out
of the recession, transportation construction will benefit from increased attention to needed infrastructure spending to assure goods and people
move efficiently across the country, and the transportation system is both safe and sufficient to handle the growing traffic.
Trends:
• Reauthorization of transportation bill was extended another six months, but will need
more permanent funding bill.
• American Jobs Act calls for $50 billion for transportation, if passed.
• The FAA projects passenger growth will increase 3.7% a year over the next five years. System
capacity is expected to grow 3.6% annually until 2031.
• By 2021, more than one billion people a year will take to the air.
• Growth in container ports is recovering from recession.
• Intermodal transportation will be the focus of new projects.
• Railcar loadings are down slightly over 2010 levels.
Drivers:
Polulation
Government Spending
Transportation Funding

Section 3: Construction Outlook
75
Communication
Communications construction is showing signs of recovery as CPIP will add 4% over 2010 levels to $19 billion, and another 3% growth is expected
for 2004. The trend to move data storage to the “cloud” will increase growth of data centers. Integrating systems such as health care will
increase IT spending. Generally, communications is technology-driven and only limited by consumer demand.
Trends:
• Moving computer storage and retrieval to the cloud will enable greater use of “thin-client” terminals.
• Devices such as cell phones and laptops are consolidating and requiring greater bandwidth and
interconnectivity.
• Consolidation of ownership and shift away from print media will continue into 2012.
Drivers:
Innovation/Technology
Global Mobility
Population
Security/Regulatory Standards
Private Investment
Manufacturing
The manufacturing sector has been one of the hardest-hit in the recession with a 33% drop in 2010 and another 6% expected in 2011 compounded
with a 2% loss in 2012 to just $35.8 billion. U.S. manufacturing has lost more than five million jobs, nearly 33%, in the last decade.
Trends:
• Manufacturing construction fell 33% in 2010, with an expected 6% decline in 2011. Growth is
not expected to return until 2013.
• Several multibillion-dollar projects are under construction.
• There were six years of strong growth through 2009, almost doubling the size of the market before
sharp decline.
• Capacity utilization is rising, but still only 75.5%.
• Automotive industry in slow recovery, but expects to hire in 2012 and increase capital projects.
• Politicians are talking about incentives to “repatriate” manufacturing in the U.S. from offshore.
Drivers:
PML
Industrial Production
Capacity Utilization
Factory Orders
Durable Goods Orders
Manufacturing Inventories

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The 2012 U.S. Markets Construction Overview
Non-building Structure
Power
Power construction has benefited from both the growth in sustainable energy, like solar and wind power as well as more traditional power sources.
Construction put in place for 2011 should be $89.7 billion or 7% over 2010 with another 5% expected to be added in 2012. According to the
American Public Power Association (APPA), nearly “446,000 Megawatts (MW) of new capacity is under some degree of development.” Natural gas
and coal still dominate new capacity, but wind is expected to grow faster than nuclear power, with solar making up 4.3% of new capacity. While
older capacity will be decommissioned, demand from businesses and factories is expected to grow only 0.7% annually through 2035. Residential
demand has slowed from 2.5% annually to just 2% due to conservation practices.
Drivers:
Trends:
• Expectations of four to six new nuclear power plants in the U.S. by 2020 will be reduced
due to costs versus alternative fuels and concerns for safety.
Industrial Production
Population
• Obama pledges nuclear power loan guarantees.
Nonresidential Structure Investment
• Wind power represents only 2.4% of America’s power supply but 18.2% of now under
construction.
• North Carolina recently approved a 300-megawatt wind farm at a cost of about $600 million in Eastern North Carolina.
• Cape Wind off the coast of Massachusetts will likely be the first offshore wind project with 130 wind turbines generating 420
megawatts.
• Power grids are insufficient to handle the output of wind farms, especially in remote areas where there is the most wind potential.
• Solar power is an alternative. Florida Power & Light, the state's largest energy supplier, is building three solar plants. It will take Florida
from not being on the solar map to being the second-largest producer in the nation, after California. By the end of next year, the plants
will produce 110 megawatts of electricity, enough for 35,000 homes and businesses.
• Big Solar will generate jobs as well as electricity: solar thermal and photovoltaic power plants.
• Lower cost of traditional energy will slow the advancement of alternative energy plants.
• Clean coal is still in the experimental phase, but billions will be spent on full-sized utilities.

Section 3: Construction Outlook
77
Highway and Street
Due to shrinking state budgets and a struggling residential market, highway and street construction slowed in 2011 to 3% below 2010 levels, but
it is expected to make up 2% of the loss in 2012. This sector is under the microscope as it is closely tied to the ability to generate jobs faster than
other sectors. The ARRA helped to keep it from falling faster in 2010, and reauthorization of the transportation bill will help it keep from declining
further in 2012. Nonetheless, if budget cuts decrease infrastructure spending rather than increase it to help put people back to work and repair
failing highways and bridges, this sector could again see steep declines in coming years.
Trends:
• The National Infrastructure Bank proposed by the Obama administration could spur development
of needed projects as well as increase private investment and P3s.
• Reauthorization extension of the high-transit bill keeps highway construction from sharp drop in
the near term.
• National Surface Transportation Policy and Revenue Study Commission report calls for more than
$225 Billion annually “for the next 50 years to upgrade our surface transportation system to a state
of good repair and create a more advanced system.” (Bill H. R. 402)
• Funding will continue to be the big question for highway and street construction.
Drivers:
Population
Government Spending
Nonresidential Structure Investment

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The 2012 U.S. Markets Construction Overview
Sewage and Waste Disposal
Along with the drop in public spending, sewage and waste disposal construction is expected to fall 2% in 2011 but grow faster than GDP through
2015. Due to the decaying state of major municipal systems, upgrades in some areas will be mandated by law. This is an area that rarely receives
public attention until something fails and public health is at stake.
Trends:
• In need of replacement and upgrades, the 16,000 wastewater systems nationwide discharge more
than 850 billion gallons of untreated sewage into surface waters each year.
• Combined sewer systems (storm water and sewage) serve roughly 950 communities with about 40
million people. Most communities with CSOs are located in the Northeast and Great Lakes regions.
• The EPA’s Storm Water Phase II Final Rule, published on December 8, 1999, expands the Phase I
storm water runoff regulations program by requiring programs and practices to control polluted storm
water runoffs.
• The American Society of Civil Engineers (ASCE) gave drinking water and wastewater “D” grades in its
2009 American Infrastructure Report Card.
• The Clean Water State Revolving Fund (CWSRF) programs have provided more than $5 billion annually
in recent years to fund water quality protection projects.
• ARRA contributed $4 billion to the CWSRF.
• The March 2010 U.S. Conference of Mayors Water Council report forecasts that future spending for
public water and wastewater systems will range between $2.5 and $4.8 trillion over the next 20-year
period, 2009 to 2028.
Drivers:
Population
Industrial Production
Government Spending

Section 3: Construction Outlook
79
Water Supply
Like all other areas that heavily depend on public funds and new residential construction, water supply construction has been struggling to gain
traction with another 2% drop expected in 2011 and 4% growth to $15.6 billion in 2012. While most of the headlines are focused on energy conservation
and sustainability, clean water is even more essential and a sign of the health of a nation’s economy. Storms causing temporary outages of
water supply in the Northeast reinforce this fact, but construction must do more than just emergency repairs to assure safe and reasonably priced
water sources in the coming years.
Trends:
• Seven billion gallons of clean drinking water are lost to leaking pipes each day, owing to an annual
investment shortfall of $11 billion (EPA) to replace old systems.
• Approximately 17 million people in the U.S. are served by substandard water facilities.
• The EPA is in the process of improving numerous drinking water standards for various impurities.
The agency is considering further revisions to the lead and copper rule.
• Federal assistance for the safe drinking water State Revolving Fund (SRF) in the 11-year period between
1997 and 2008 totaled $9.5 billion, just slightly more than the investment gap for each of those years.
• Green construction practices, such as controlling runoff to help increase groundwater, will become the
norm for improvements and new construction.
Drivers:
Population
Industrial Production
Government Spending

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The 2012 U.S. Markets Construction Overview
Conservation and Development
The high rate of damage from natural disasters in the past two years has strained FEMA and Army Corp of Engineers (USACE) funding. However,
while slow in 2011, conservation and development construction is expected to grow 5% in 2012.
Trends:
• President's budget for 2012 (FY12) includes $4.631 billion in gross discretionary funding for the
Civil Works program of the U.S. Army Corps of Engineers ($1.48 billion for construction).
• The goal of EPA's Brownfields Program ($100 million) is to revitalize and restore neighborhoods
through environmental cleanup. The program has a proven history of attracting private investment,
producing trained environmental technicians, creating jobs and spurring local economic
development.
• EPA's Superfund Hazardous Waste Cleanup ($600 million) funds the cleanup of uncontrolled
hazardous waste sites.
Drivers:
Population
Government Spending

Section 3: Construction Outlook
81
Construction Put in Place
* Improvements include additions, alterations and major replacements. It does not include maintenance and repairs.
* Improvements include additions, alterations and major replacements. It does not include maintenance and repairs.

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The 2012 U.S. Markets Construction Overview
Regional Summaries
Of all the regional construction markets, New England is the only one expected to have lower construction put in place for 2012 (-2%). The largest
increase on a percentage basis will be in the Mountain region, where we expect 17% growth, largely attributable to construction for mining and
natural resources growth. The Pacific region is the next-highest growth region with 13% expected in 2012 over 2011; but the South Atlantic region
is the largest in total, spending expected at $174 billion. Mountain and Pacific regions are expected to have the highest rates of increased activity in
the residential sector in 2012, although, next to Pacific, the South Atlantic will have the most residential construction put in place at $60.8 billion.

Section 3: Construction Outlook
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Regional Summaries

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The 2012 U.S. Markets Construction Overview
Regional Summaries

Section 3: Construction Outlook
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Regional Summaries

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The 2012 U.S. Markets Construction Overview
Regional Summaries

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Regional Summaries

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The 2012 U.S. Markets Construction Overview
Regional Summaries

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Regional Summaries

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The 2012 U.S. Markets Construction Overview
Regional Summaries

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Regional Summaries

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